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Monday, November 19, 2012

The Upcoming Obama Recession: Even Without the Fiscal Cliff, A Recession Still Looms

By Susan Duclos

With all the talk about the fiscal cliff and some grand bargain between Obama, Democrats and Republicans stopping the U.S. from going over the cliff, reports show that Investments have already gone over that virtual cliff and the U.S. GDP forecast has shrunk to 1.5% and empirical evidence shows that preventing it would only postpone the next recession for a very short amount of time.


U.S. companies are scaling back investment plans at the fastest pace since the recession, signaling more trouble for the economic recovery.

Half of the nation's 40 biggest publicly traded corporate spenders have announced plans to curtail capital expenditures this year or next, according to a review by The Wall Street Journal of securities filings and conference calls.

Nationwide, business investment in equipment and software—a measure of economic vitality in the corporate sector—stalled in the third quarter for the first time since early 2009. Corporate investment in new buildings has declined.

At the same time, exports are slowing or falling to such critical markets as China and the euro zone as the global economy downshifts, creating another drag on firms' expansion plans.

Corporate executives say they are slowing or delaying big projects to protect profits amid easing demand and rising uncertainty. Uncertainty around the U.S. elections and federal budget policies also appear among the factors driving the investment pullback since midyear. It is unclear whether Washington will avert the so-called fiscal cliff, tax increases and spending cuts scheduled to begin Jan. 2.

GDP Forecast:- Northern Trust

Our expectation remains that the worst case will not come to pass, and that the cliff will be softened to a slope sometime in the next six to eight weeks.  Still, it is unlikely that all of the spending cuts and tax increases will be reversed, and we’ve reflected that in a forecast for a somewhat softer first quarter of 2013.

We have tweaked our forecast of fourth quarter GDP to account for Sandy and to reverse some non-recurring increases seen in the third quarter.  As a result of these changes, we expect fourth quarter real GDP to advance at a 1.5% annual pace, representing a slowing from the third quarter.

Click to enlarge

Key elements of the current forecast include:
  • Consumer spending is projected to have grown only 1.5% in the final three months of the year, a slowing that is partly related to the storm.  Incoming household sector data on employment, sales, housing starts, and home prices point to improvements that will make a positive contribution to fourth quarter real GDP growth. 
  • Business spending is estimated to have advanced at a tepid pace, as firms continue to hold back as fiscal policy discussions continue. 
  • Net exports should post a small widening as exports are held back by soft economic conditions abroad.
  • The Federal Reserve will not waiver from its current course.  The President’s re-election makes it much less likely that a change in philosophy is at hand.
Economic developments in Europe and China will have an important bearing on the growth path of the US economy.  We continue to assume orderly resolutions of present challenges in both markets, but the risk of disorder remains.

Let us assume, for the sake of argument, that Washington fashions some grand bargain, what happens next?

 Should the politicians avoid the fiscal cliff, most likely by putting taxes up on high incomes while leaving most of the budget deficit in place, the short-term prognostication isn't all that wonderful.

U.S. economic growth has been held back in the last few years by the blizzard of regulations coming out of Washington, and there's reason to believe there is an especially heavy storm of them coming in the next few months, having been held up before the election.

Thus, no matter much money Ben Bernanke creates, the U.S. economy is not going back to robust growth in 2013. Creating more money will just increase inflation, and together with the continuing budget deficit will suck capital out of the U.S. towards our creditors such as China and Japan.

In the long run, a recession is coming, like it always was. With bad policies in place worldwide, that recession will almost certainly be less painful if we get it over quickly, and don't delay it into 2014 or later.

After all, with each year that passes under the current policies, the level of foolish investments in the financial system increases, so a delayed recession might well involve another financial crisis, like 2008 - and we've seen how much fun that was.

 Economists are warning that we are "dangerously" close to another recession:

Ideally, Mayland said, the politicians will put some extension in place to provide more time to find a solution and not all of the components of the fiscal cliff will go into effect Jan. 1.

Despite some improved economic indicators, the United States remains in “a fragile economic situation.”

Mayland said America is “flirting with recession” in early 2013 depending on how many segments of the fiscal cliff take effect.

In Obama’s second term, it’s reasonable to expect continuation of his same policies, and a continued mediocre economy. The nation’s  economic growth continues to run below the historic 3 percent annual average, he noted.

The answer is not one that Obama and Democrats are willing to consider:

 “Is 2 percent growth the new normal? I refuse to accept that,” Mayland added. “We have the capacity to grow 4 percent to 5 percent annually.”

Mayland said corporations are sitting on $2.5 trillion in financial resources here and overseas amid an unfavorable climate for business.

“The economy has lots of industrial and labor slack, which could allow for strong and sustainable growth,”  Mayland noted in his presentation.

To fix the economy, Mayland suggests three major moves: First, the U.S. needs an “all-out program to attain energy independence” taking advantage of our domestic natural resources. Second, “greatly scale back the regulatory quagmire” of more and more government red tape that is both expensive and stifling to businesses. Third, replace the complex 80,000 federal tax code with a simple flat tax of perhaps 18 percent.

“I guarantee we’d set the economy back growing at its potential,” if such steps were taken, Mayland said.

Dire Warnings:

But things also could get much worse, he cautioned.

Unless the U.S. stops piling up $1 trillion annual deficits and adding to its current $16 trillion accumulated national debt, we are “courting disaster.” In three to five years we could find our nation facing a chaotic situation such as that being suffered in Greece, he warned.

About those job killing, economy stalling, regulations?

It is about to get much worse:

The administration has also failed to release a required regulatory outlook document, describing its regulatory agenda. Such documents are supposed to be published every six months; the most recent one was published in January, making this the longest lag between outlooks since the deadline schedule was created in 1994.

The slowdown comes in an election year in which government regulation has exploded as a hot campaign theme. Romney has assailed the president for costly overregulation, often slamming specific rules: He describes EPA regulations of power-plant pollution as a “war on coal,” and a rule requiring employers to cover contraception in their health insurance plans triggered a firestorm over a “war on women.”

Sources in regular contact with agencies say they've been told that new rules won’t resume until after the election, and many expect an avalanche of new major rules shortly afterward.

"They're ready to burst," said Susan Dudley, director of the Regulatory Studies Center at George Washington University and a top official at the White House Office of Management and Budget during the George W. Bush administration. "Some people use the analogy of a closet door—you keep putting things in, and it's ready to burst."

In the business community, the anticipated surge of coming regulation has been likened to a tsunami. Business groups are worried about health care and environmental regulations, but also major outstanding labor rules. The agencies charged with implementing the Dodd-Frank financial reform law have routinely blown through legislative deadlines.

"There is a lot that's sitting, waiting to come out," said Daniel Bosch, manager of regulatory policy at the National Federation of Independent Business. NFIB estimates that there are more than 4,100 regulations in the pipeline. That list does not include the many anticipated regulations that are still with administration agencies.

 Sen. Inhofe recently warned that new EPA regulations pending could cost the U.S. up to 887,000 jobs a year.

Finally we get to what Washington Post calls the "scariest" graph graph you will see and it comes from the Congressional Budget Office:

Obama's onerous regulations and policies have not worked and have actually slowed down the nation's recovery efforts, despite artificially stimulating it with $800+ billion "stimulus package" which gave the illusion of a growing economy without addressing the issues that caused the initial recession, therefore when the money runs out, the illusion fades and the overspending, out-of-control debt and deficits once again throws America off the cliff.

The Obama recession is coming, the only question that remains is "when is it going to hit?