As 2015 draws to an end, it’s time to take stock as a People and as a Nation. The first essay on Liberty is For the Win was about looking at the affects of fifty years of leftist policies upon the twenty largest cities of the 1960’s, at that time centers of commerce, prosperity, and wealth. To close out this year, it’s fitting to look at the economic impacts that have occurred this year since that first article.
June was at the end of the 2nd Quarter, a strong quarter with a GDP growth rate of a fairly robust 3.9%. This would qualify as a strong indicator regarding the health of the economy, however it followed an unusually weak preceding quarter, with a meager 0.5% growth rate. So rather than a strong economic statement, the strong Q2 performance demonstrated only the economy had yet to find a footing, and much of the Q2 economic activity was delayed from the first Quarter of 2015.
Job creation was relatively robust in Q2 as well, with just shy of 700,000 net jobs created. Another relatively strong sign, except March saw a steep decline in job creation (only 119,000). Of the 11 months with job numbers reported (December numbers will be released in January), 8 failed to reach 250,000 jobs per month, where serious gains toward reducing the numbers of long term unemployed and underemployed are made. Of those 8 months below the 250K mark, 4 failed to reach 200,000 jobs, the number of jobs necessary just to keep unemployment level.
The 3rd Quarter was initially reported as having a GDP growth rate of an anemic 1.5%, revised up to 2.1%, but then down to 2.0% per the third estimate. Far lower than a robust 4.0% growth associated with an expanding economy. And, as of yet, there hasn’t been even a single quarter with GDP growth of even near 5% under Obama.
After every recessionary cycle on record, GDP Growth has spiked, marking the beginning of the recovery cycle. The deeper the recession, the larger and longer the spike lasts. For example, after the 2001-2002 Recession, the GDP growth spiked to 3.8% in Q2 of 2003, peaked at near 6.9% in Q3 2003, and finished the year at 4.8% in Q4. There has been no such spike under Obama’s tenure. The closest being Q2 and Q3 of 2014, with 4.6% and 4.3%, however there is strong evidence to suggest that this growth is attributable to George W. Bush’s 2003 Tax Cuts being made permanent in June 2013. After those cuts were made permanent, there were 5 out of 6 quarters of growth rates above 2%, and 4 of those periods with rates above 3%, peaking in Q2 of 2014. It’s ironic that the best sustained economic growth of Obama’s presidency can arguably be credited to a Bush era policy.
This month, the Federal Reserve announced that it was increasing the core loans rate for the first time since 2006, from effectively 0.11% to 0.36%, as the board gently tries to reset the breaks on the economy, but not because there has been a clear signal that the economy has recovered, because there clearly hasn’t been. The Federal Reserve is applying the breaks under the presumption that the economy is in a recovery cycle, and has been for some time, just an unusually shallow one, but 2014 had better GDP growth and job numbers than 2015, so why didn’t the Federal Reserve raise rates in 2014? Why now in the 4th Quarter of a weaker 2015?
Because the economy is on borrowed time.
Prior to the Reagan Revolution, the average growth cycle lasted between 4 to 5 years between recessions. After Reagan, the growth cycle has lasted between 9 to 10 years. Reagan did this through large cuts to the income and corporate tax structures in the 1980’s, as well as robust deregulation, which removed burdensome costs upon businesses. This gave birth to the years of prosperity from Reagan, to Bush 41 and Clinton, through Bush 43, until the Great Recession in 2008 unwound the gains of 30 years.
While most of the George W. Bush era tax cuts were made permanent in 2013, which reduced many tax rates back to near Reagan era levels, Obama’s regulatory policy has been anything but about reducing government. The size and scope of government has increased in raw spending ($2.902 trillion under Bush in 2008 versus $3.688 trillion under Obama in 2015), as well as deficit spending ($160.7 billion under Bush in 2007, to eliminate Recession effect, versus $438.9 billion under Obama in 2015). By every standard of measure, Obama has increased the size and scope of government.
So the question that must be on the Federal Reserve Board member’s minds is how much gas is left in the tank of what passes for this recovery? Are we still on the 9 to 10 year rate after Reagan? Or have we lost ground because of the “fundamental change” that Obama promised to bring to the United States? Before the next recession hits, the Federal Reserve needs to have the core loans rate up around at least 3.0%, if they are going to be able to have room to reduce it to stimulate the economy through monetary policy. The economy will also have to be weened off of Quantitative Easing. Only then will the Federal Reserve be in position to deal with anything much more than a shallow correction.
The Great Recession officially ended in June 2009, putting Liberty is For the Win exactly 6 years after the start of the recovery. There have been too many interventions and too many increases in regulation to maintain the 9 to 10 year growth cycle. Consumer costs on everything from food to used automobiles have been increased under Obama, and these prices increases have largely been unchecked by the Federal Reserve. Between cutting taxes and raising regulatory pressure on the economy, Obama has split the difference, but the damage is done.
The economy is due for an economic correction, and so many markets are price inflated far above their values, especially in commodities. In many of these markets, the regulatory pressure is too great to reduce prices, so the fall out will be likely be pushed upwards in the economy. In all likelihood, the economic cycle appears to be shortened to 7 to 8 years, which would put a corrective recession on track between Q3 of 2016 and Q2 of 2017, perhaps earlier if Q4 2015 numbers are weak.
With ten million American workers still unemployed or underemployed, another recession after such a tepid recovery and nonexistent growth period will hit workers and consumers harder and longer than in previous cycles, prior to the Great Recession.
Pray for a soft landing.
Happy New Year.
Liberty is For The Win!