Observations

Written by Jeff Thredgold, President, Thredgold Economic Associates

September 28

Wednesday of this week marks the end of a very busy (and most welcome) period of speaking events…13 presentations in 11 different industries; 24 flights over 20 days; events in nine different states plus Vancouver, BC; with four separate trips to the East Coast…which is not exactly close to my home in northern Utah…

Delta airlines…you are welcome 

To my broken down body…I’m sorry

Fortunately, October is shaping up to be more of the same…good news after some bleak speaking months earlier this year

I thought this issue of the Tea Leaf might focus on a variety of events that took place last week…

The Recession’s Over
Just wondering, have you and your neighbors had a party in recent days, celebrating the end of the longest, deepest, most costly, most painful, and most pervasive recession since the Great Depression?

…not on our street either

As you have likely heard, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) announced on September 20 that what we now call the Great Recession ended in June 2009. Fortunately, this end date was within the June-September 2009 range I and most other forecasting economists had been predicting for most of this year.  The recession “officially” ran for 18 months, with a 4.1% peak-to-trough contraction in GDP—and a loss of more than seven million jobs.

Yes, the recession is over…statistically.  However, from an emotional or job creation or housing stability or commercial real estate stability or income growth or confidence building perspective, it is still with us.  Our collective growing anxiety about the anti-business, anti-higher income earner rhetoric constantly coming from the Administration and the Congressional leadership has definitely not helped.

Brilliant, long-time investor Warren Buffet, now a sprightly 80 years of age, suggests the recession is still with us, as most people and businesses still aren’t doing as well as they were before the financial crisis.  By his measure, recession could be with us for a few more years.

QE2?
The Federal Reserve’s Open Market Committee suggested early last week that “measures of underlying inflation are currently at levels somewhat below those the committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.” 

What that means in English is that Federal Reserve Chairman Bernanke and his cohorts at the Fed are extremely concerned about the “D” word…deflation.  Inflation pressures have been declining (some call that disinflation) in recent months, raising the specter of a Japanese style deflation in coming years.

During late 2009 and throughout early 2010, the Fed bought roughly $1.7 trillion of mortgage-backed securities and U.S. Treasury securities.  The process was referred to as “quantitative easing.”  The intent was to provide more monetary stimulus to an economy in need and help push long-term interest rates lower.

The program was successful to the extent that mortgage rates fell roughly one-half percent.  Such rates have fallen even further, however, in recent weeks as more signs of U.S. economic slowing and potential deflation have become evident.

Additional “Fedspeak” noted that “the committee…is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”  What that means is the Fed will step up with more purchases of U.S. Treasury and mortgage-backed securities IF the economic recovery continues to lag.

Financial markets reacted immediately to the Fed’s comments, with stock prices moving higher and the dollar moving lower.  At least in the near term, stock investors see the Fed as their “friend.”

Such a new program, referred to as “quantitative easing 2” (or QE2 for short) is not the Fed’s first preference.  It simply will make it more difficult for the Fed to reduce excessive money creation when and if the economy stabilizes, and inflation possibly shows its ugly head…

…until then, however, the Fed will take that chance if required to

Summers Over
The announcement that Lawrence Summers, director of the National Economic Council for the Obama Administration, will leave the White House at the end of the year brings to three the number of major economic advisors to the President that have announced they are leaving, or have already left. 

Summers announcement follows earlier departures of White House budget director Peter Orszag and the head of the Council of Economic Advisors, Christina Romer.  The only major player left is U.S. Treasury Secretary Tim Geithner.  I am tempted to say something about them leaving a sinking ship, but I will refrain.

Summers will return to teach at Harvard, where he formerly served as Harvard’s president.  Summers, never highly regarded for his people skills, has been both credited and vilified for his performance, a combination that will continue into the history books.

He deserves some credit for steps this Administration took to help stabilize a downward spiraling U.S. economy when it first took office in January 2009.  I would suggest, however, that the $814,000,000,000 stimulus program of early 2009—greatly influenced by Summers—was poorly structured, too focused on a long-desired Democratic wish list of more government and more social spending, and would have been much more effective by simply cutting taxes at that point.

Summers will be forever linked to what many would suggest was the failed Keynesian (pronounced Canes-ian) stimulus program, the idea that more and more government spending could help the economy to grow.  I would argue that consumer and corporate anxiety about $1,000,000,000,000 annual budget deficits for as far as the eye can see, combined with all shapes and sizes of other new government spending and bureaucratic red tape, more than offset any positive aspects of the Keynesian approach.  To spend the kind of money we are spending in Washington, combined with unprecedented monetary stimulus…and to achieve only meager economic growth is pathetic, to say the least.

Jay Leno perhaps said it well last week, “President Obama’s top economic advisor, Larry Summers, is stepping down.  Well, who could blame him for wanting to go out on top.  Talk about a job well done.”