Financial FAQs

The summer growth numbers seem weak, and pundits are saying it’s due to the European recession (so lower exports), the ‘fiscal cliff’(employers uncertain about future growth), and consumers with too much debt. But the numbers really show a repeat of last summer, when hiring slowed due to basically the same worries but picked up again in the fall (due to the Japanese Tsunami instead of euro, and debt cap stalemate that downgraded U.S. debt).

However, overall growth is still weak because so much income has been transferred to the wealthiest; particularly since 2000 and the Bush tax breaks, leaving middle class earners with even less income than in 2000. In fact, middle incomes have not even kept up with inflation since 2000. And middle income earners—i.e., most consumers—have been the main engine of U.S. growth since World War II.

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Graph: CBPP

The good news is the Conference Board’s Index of Leading Economic Indicators which seems to alternate in up and down months, still shows moderate growth prospects for the rest of the year.

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Graph: Econoday

For instance, since July 2011 growth in the Coincident Indicators that tracks GDP growth has been positive 8 of the past 12 months, with huge spikes in October and December 2011 and only 1 negative month in March 2012. The Leading Indicator that attempts to predict growth over the next 6 months was more negative with 4 contractions in 12 months. But in fact, the Leading Indicator has grown 1 percent in the past 6 months, up from 0.5 percent over the prior 6 months, signaling better prospects for growth.

So why all the fears of a dismal rest of the year? Could it be the 24/7 news cycle that exaggerates both the good and bad news? That is what causes most ‘bubbles’, according to Robert Shiller of Irrational Exuberance fame. We are literally being showered with too much economic data that even economists are hard put to understand.

For instance, other indicators also point to better growth in the fall. By major components, June industrial production gained 0.7 percent after falling 0.7 percent in May, according to the Fed. Motor vehicles output added significantly to manufacturing, rebounding 1.9 percent in June after a 2.2 percent decline in May. Manufacturing excluding motor vehicles was quite strong also gaining 0.6 percent in June, following a 0.5 percent drop in May.

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Graph: Econoday

So once again growth far outnumbers contraction in the manufacturing sector, with just 4 contractions in the past 17 months. So it seems rumor drives much of business and consumer confidence, as Europe’s problems seem to be affecting U.S. growth, but know one knows how much. So it is all about ‘momentum”, the magic word that spurred so much inflated stock values in the last decade, but now seems to deflate expectations for future growth!

What to do about this? Firstly, we need to counter the pessimists with greater stimulus spending, which more than pays for itself in increased activity. It can even be revenue neutral. For the real reason growth has been so tardy is most of the profits from the past 10 years of growth have gone to the wealthiest, thanks both to record corporate profits, and record tax cuts for the investor class, as I said—the lowest tax rates since the 1920s—that have drastically lowered tax revenues and increased the federal deficit.

So right now, it is the intransigence of many of the richest among us (such as Mitt Romney with his tax havens) who refuse to divert some of their wealth to provide more stimulus during a time of record income inequality. It is their refusal to return to the pre-Bush, Clinton-era taxation levels of 1992-2000 when most growth occurred and most jobs were created, in other words, that is holding back a real recovery.

Harlan Green © 2012