posted July 24, 2011
Double Dip Recession on the Horizon

Hang on to your economic crisis hat. The recession that never really ended is coming back. The recovery waiting to happen for more than three years now has still not arrived. In fact, it took a detour on the way to the US—not once but twice. First in the summer of 2010. Again now in 2011.

Economic recovery under the Obama administration has been the weakest recovery on record of all the eleven recessions in the US since 1945. It has also proven to be the most lopsided recovery of all the post-1945 eleven recessions—benefiting investors, corporations, and the wealthiest 10% households but not workers, homeowners, small businesses and the remaining ‘bottom’ 90%, 100 million, households.

Comparing Economic Recoveries

According to the Minneapolis district of the US Federal Reserve Bank, 13 quarters after their pre-recession peak, total US economic output for the two worst prior US recessions—i.e. 1973-75 and 1981-82—had risen by 6% and 10%, respectively. For the 2007-09 recession, 13 quarters after the peak, total output has risen only 0.5%. Similarly for consumption, which makes up 70% of the economy. Since December 2007 it has grown a paltry 0.5% in real terms as well, according to a recent assessment by Moody’s Inc. chief economist, Stephen Roach. Or as Roach put it in a Financial Times guest editorial this past June, “Never before in the post-second world war era have US consumers been this weak for this long?. Roach is largely, though not totally correct. His statement undoubtedly holds true for the bottom 90% consumer households. But the wealthiest 10% households now account for 60% of all consumption in the US, according to some estimates, which means the 0.5% real rise to which he refers is actually a strongly negative number for the bottom 90%.

A comparison of the current with previous recessions is also possible from the beginning of the recovery period that starts once the recession is officially declared ended. The Obama recovery period begins in July 2009. A comparison of recessions shows the following: 12 months after the official end of the 1973-75 recession the economy was growing by 6% a quarter and 3.2% a quarter in the second 12 month period. For the 1981-82 recovery period, it grew 7.75% a quarter in the first 12 months and by 5.6% per quarter in the second 12 months. In contrast, for the ‘Obama recovery’ of the past two years, the economy grew only 3% in the first twelve months following the end of the recession, and then only 2% in the next 12 months. (For the last six months, the first half of 2011, the Obama recovery is now averaging between 1.5% -1.8%.)

Whether measuring from the start of the recession or from the point at which the recovery was to begin, the current Obama recovery period—July 2009 to June 2011—has significantly lagged prior recoveries. In fact, by well less than half, despite having provided a fiscal stimulus of $830 billion, $9 trillion on bank bailouts, hundreds of billions more bailing out non-bank companies like GM, AIG, and others, and at least another $300 billion in additional business-investor tax cuts just in the recent year. Worth noting as well, at the two year mark recoveries from the two prior recessions had become self-sustaining, whereas the Obama recovery at today’s two year mark appears increasingly headed toward a ‘double dip’ recession.

The Obama recovery’s dismal showing in terms of total output does not show the full extent of the current situation, however. The picture is much worst for key sectors of the economy like housing and jobs.

With regard to jobs, in the two worst recessions prior to the present, 1973-75 and 1981-82, total employment had risen by 5% over pre-recession levels after 42 months. Today, after 42 months, total employment is still more than 5% below the level it was at the start of the recession in December 2007. Moreover, the 5% below significantly underestimates the total. It does not count involuntary underemployment or workers who involuntarily leave the labor force because they can’t find work. If one were to count those categories, the short fall in total jobs after 42 months would be approximately 10%. That’s 17 million more still out of work, in addition to the 7.1 million at the start of the recession in 2007, and a total of 24 million still jobless after 42 months.

For the critical residential housing sector the picture is even worse. Housing is now by several indicators in worst shape than it was in the 1930s. There have been at least three ‘waves’ of foreclosures since 2007, driven first by subprime borrowers, then rising jobless numbers, and most recently by a growing tide of homeowners experiencing ‘negative equity’ and abandoning homes worth far less than their mortgages cost. Foreclosures now approach 10 million, with some sources predicting 13-14 million before the current housing cycle bottoms. That’s about one fourth of all mortgages in the U.S. The numbers for homes in negative equity are even greater, at around 16 million. New home construction is down 75%, as is the index for mortgage purchases. After having experienced a 25% decline in 2008-09, home prices are now falling again for the past nine consecutive months—4.2% in just the first three months of 2011. From their peak in July 2006, home prices in the 20 major cities have fallen by more than 60%. By any measurement, that’s nothing less than a depression, let alone recession.

In comparison, residential housing in the two previous worst recessions expanded rapidly soon after the end of those recessions and led a sustained economic recovery. The recovery period from the 1973-75 recession saw residential housing growth snap back by 106% in the first 12 months and another 80% in the next 12. Recovery from the 1981-82 recession saw housing recover by 208% and 16% for the 12 and 24 month periods. In stark contrast, during Obama’s recovery period housing activity rose only 36% in the first twelve months and then actually fell by 30% in the second 12 months. There’s never been a recovery from a post-1945 recession without housing leading the way. Today housing is leading once again—but toward a further contraction instead of recovery.

The ‘Triple Dip’ in Jobs and Housing

After 13 quarters, Jobs and Housing have not only not recovered. They aren’t even approaching a double dip. They’ve already experienced that. They are entering a ‘third’ dip.

After a collapse of employment of historic dimensions from mid-2008 through June 2009, the US jobs market experienced a major relapse in the summer of 2010. For a second time, the number of jobless rose for four consecutive months from June to September 2010. Over those four months the number of unemployed rose by 206,000 and the number of workers leaving the labor force, having given up finding a job, rose by another 235,000. By September 2010 there were 650,000 fewer workers with jobs than there were when the recession officially ended in June 2009. That first ‘double dip’ in jobs in the summer 2010 was followed by a modest recovery of jobs for a short period, from October 2010 to April 2011, after which job growth declined sharply once again heading for yet a second double dip.

A similar scenario describes the housing market. Residential housing experienced a collapse from 2007 through 2009, falling by double digit percentages every quarter except one. Only the first quarter following the end of the recession in June 2009 did a modest 10.2% recovery of housing occur. That was almost totally due to the introduction at the time of the ‘first time homebuyers program’. But even that program was not aggressive enough to sustain a housing recovery. Housing re-collapsed in the next two quarters. It was followed by another one quarter recovery in the spring of 2010, as homeowners rushed to take advantage of the ‘first time homebuyers’ program before it was discontinued. But all the gains of that quarter were wiped out in the summer 2010 ‘double dip’. Residential housing has therefore already experienced a double dip. It began contracting yet a third time in the first quarter of 2011 and has continued to do so. Residential housing now languishes 75% below its pre-recession high, and there is no sign of recovery anywhere.

Jobs and Housing were not the only sectors that confronted a relapse in the summer 2010. After a year of recovering a third to half of their losses from the 2007-09 recession, other economic sectors also stalled out. To note but a few: retail sales recovered only half of its prior decline by summer 2010. Business spending rose only 3% in the first half of 2010, after having fallen to post-1945 record of –6.7% in 2009. In the two prior worst recessions, 1973-75 and 1981-82, business spending slowed but never actually declined, i.e. ‘went negative’. Industrial production was still off 30% by mid-2010, as were durable goods and other key indicators. And, after rising to 58 in the first quarter of 2010, the manufacturing activity index fell once again to 50 by July 2010, a level indicating no growth.

The Second Aborted Recovery of 2010-2011

Deeply concerned with the re-collapse of jobs and housing in the summer 2010, the Obama administration, together with the Federal Reserve, attempted to prevent a double dip and check the re-emergence of the dangerous bogey of deflation. The Fed moved first, introducing what as called ‘Quantitative Easing II (QE2). QE2 meant the Fed bought up $600 billion in bonds, mostly bad mortgage bonds and long term Treasury bonds, from investors at phony inflated rates. That pumped more money and liquidity directly into the economy. QE2 followed a prior QE1 $1.75 trillion bond buying binge by the Fed in 2009.

QE2 had an impact, but not on jobs or housing recovery. It lowered the value of the US dollar in global markets, thereby stimulating US exports to some degree, and the US manufacturing sector indirectly in turn. However, only 74,000 manufacturing jobs were created between 2009-10, not all of which are attributable to the effects of dollar drive exports. No more than 3,000 jobs a month can be attributed to QE2 therefore. As for Housing, QE2 was theoretically supposed to lower mortgage interest rates. Those rates actually rose, however, in the immediate wake of the introduction of QE2.

QE2 effect on a lower dollar had other negative consequences. It may have stimulated exports slightly (and jobs in manufacturing hardly at all), but it also served to feed a boom in speculative investing in oil, food, and other commodities for the six months from October 2010 to April 2011. This provoked oil, food, clothing and other price increases that crushed consumer spending and consumption by the spring 2011, contributing toward setting the economy on a course to a double dip. Here’s how it worked. Banks borrowed from the Fed at an interest rate as low as 0.1%–i.e. free money. They loaned the funds in turn not to small businesses desperately in need of it to create jobs, but to speculators like hedge funds, private equity firms, and others. The speculators then invested the loans in oil and other commodities, setting off the price increases that devastated consumers in the spring of 2011. QE2’s negative effects on recovery, through the medium of depressed consumption due to commodities inflation, were no doubt greater than its positive effects on manufacturing exports and manufacturing jobs. To the extent QE2 benefited manufacturing, it did so by benefiting manufacturing corporations’ profits and shareholders. It is not surprising that, with QE2 scheduled to conclude in June 2011, that the expansion of US manufacturing began to hit a wall. The double effect of slowing economies in China, Brazil, India and elsewhere, combined with the end of QE2, meant that a manufacturing driven economic recovery in the US, on which Obama had pinned his hopes to lead a recovery, will not now happen.

QE2’s greatest success was achieving a second boomlet in the stock markets, and consequently a surge in capital gains income for corporations and wealthy investors and the wealthiest 10% households. Like other economic sectors, after the initial 12 months of recovery stocks began to retreat in the summer of 2010, along with jobs, housing, and other sectors. QE2 boosted stocks by setting off the commodities speculation price boom. Commodities companies then led the stock recovery in the fall of 2010. In particular, it boosted the stocks of oil, energy, food, clothing and metals manufacturers. Also, bank stocks gained significantly from their role as lenders for the boom, borrowing from the Fed at 0.1% and loaning to speculators at 8%. Speculators then drove up the prices of the commodities, which in turn drove up the profits of manufacturers of commodity based products. They all made a nice profit—paid for by US consumers six months later.

Just as the anticipated demise of QE2 in June 2011 has resulted in a definite softening of manufacturing output, so too has that demised contributed significantly to the stalling out of the stock market as of June 2011.

Supplementing the Fed’s QE2 attempt to get the economy going after the summer 2010 relapse and potential double dip was the Obama team’s efforts to add some kind of further fiscal stimulus in the fall leading up to the November mid-term elections. The efforts at further fiscal stimulus were half-heartedly undertaken, however, except for some further tax cuts for small business. In what will historically prove to be one of Obama’s great strategic errors of his first term, instead of taking the recovery a step further by proosing a 2nd stimulus now targeting jobs and housing—largely left out in his 2009 first stimulus—Obama low-balled and piecemealed new stimulus efforts after September 2010. Instead of a new stimulus that would clearly benefit ‘main street’ and excite voters, Obama waited for what he mistakenly thought would be a more friendly Congress after the midterm elections.

In this strategic error, Obama historically repeated what Jimmy Carter had done in 1978 facing a similar situation and a similar sluggish recovery from a crisis. Like Carter, Obama was also trounced in the midterm elections, as even once Democratic supporters in 2008 simply ‘voted with their feet’ and stayed home in 2010.

A contrasting historical parallel to Obama’s 2010 midterm electoral disaster is the 1934 midterm elections. That year Franklin Roosevelt faced a similar stalling recovery, after also having focused on bailing out the banks, on raising corporate prices and profits, and taking minimal action to create jobs—the Civilian Conservation Corps at the time notwithstanding. FDR, unlike Obama, was smart enough to see that slowing recovery needed to take the next step. He and his advisors in the summer of 1934 then created the ‘New Deal’ (social security, works progress administration, unionization and bargaining rights, minimum wages, etc.) and took this new vision to the people in the midterm election of 1934. Roosevelt swept the field again electorally in 1934. In contrast, by playing it safe, by listening to his newly appointed big business advisors, by not taking his recovery program to the next level Obama, like Carter, was ‘shellacked’ as he put it in the 2010 midterm elections.

After the midterms, Obama’s main contribution to an additional fiscal stimulus for 2011 was to extend the Bush tax cuts for two more years—80% of which benefited wealthy investors capital incomes and corporate profits at a cost to the federal government of between $200 to $270 billion a year. This extension coincided nicely with the stock market recovery the Fed and QE2 engineered and the emerging commodities speculation boom that followed at the time. With the tax cut extension, investors would now reap capital gains from stock, bonds, and commodities speculation at a significantly less tax hit. The Bush tax cut extensions were ‘sold’ on the argument they would create the much needed jobs. But corporations were already sitting on $2 trillion in cash assets and not investing in job creation to any significant extent in the U.S. The logic of why another $400-$550 billion would now make them invest and create jobs was as questionable in 2010 as it was in 2001 and remain so today. Nevertheless, after having campaigned strongly in 2008 that he would not extend the Bush cuts under any condition, Obama did exactly that in December 2010.

Obama’s 2010 stimulus fiscal supplement also included a 2% cut in payroll taxes for workers earning less than $108,600 a year for one year. That payroll tax cut would cost the Social Security Trust Fund about $100 billion. After producing a $2 trillion surplus since 1986, the trust fund after the 2007-09 recession and 24 million remaining jobless was barely breaking even. Nevertheless, Obama’s new business-heavy corporate team of advisors had no intention of any job creation proposal. The payroll tax was supposed to stimulate household consumption in 2011. But the oil and commodities inflation set off by the Fed’s QE2 and speculators would absorb and offset the consumption effects of the payroll tax cut. By April 2011,it was estimated that 60% of the payroll tax cut had been absorbed by rising gas and energy prices alone. Obama’s business advisor team followed in June with the idea that the share of payroll taxes paid by employer’s should also be cut—thus creating even greater stress on social security finances.All the payroll tax cuts accomplish is a transfer of money from the social security trust fund and retires to the oil companies and other speculators.

Obama’s 2010 fiscal stimulus supplement amounted to no actual net stimulus at all. It was therefore not surprising that the US economy and recovery began to falter once again at the beginning of 2011. That recovery would fade even faster once the Fed’s QE2 monetary stimulus ran out by June. At mid-year the economy and recovery in effect reverted back to the stage and trajectory where it was at the beginning of summer 2010.

The 2011 Scenario

Whatever recovery has occurred since Obama entered office in 2009 has been due to what economists call ‘inventory adjustment’, on the one hand, and export-driven manufacturing. But both are now slowing sharply. Recent months show clearly than manufacturing, driven largely by export sales, has hit a wall as the global economy itself is slowing. China, Brazil, India and other global economies outside North America and Europe that buy US manufactured exports have taken steps to slow their economies at least by half. Japan, the other major economy, has already re-entered a new recession, as has Australia, the United Kingdom, and most of the periphery economies of the European Union. All that means less buying of US exports and a slowdown in manufacturing in the US. The other stimulant to exports, a declining value of the US dollar, is also as low as it is likely to get. With exports facing the various challenges noted above, it is unlikely in the months ahead to provide as much stimulus in the future. Given this scenario, it’s not surprisingly in June manufacturing across various regions of the US slumped to an almost two year low. For manufacturing, Obama’s preferred sector for leading the expansion, it’s back to July 2009 and the lowpoint of the recovery.

Consumption will also continue to slow in the remainder of 2011 for all but the wealthiest 10% households. Sales at high end retail stores, like Tiffany’s, Saks, and Nordstrom are registering record gains, while low end stores, like Wal Mart, have experienced declining sales every quarter since early 2009. In terms of broader trends, after rising 4% in the last quarter of 2010, consumption overall rose in the first three months of 2011 at an anemic 2.2% annual rate and is projected to drop below 2% in the second quarter 2011 in an undeniable downward drift. Real weekly earnings continue to fall, meaning less real consumption spending as prices for gasoline, food, health care, education and local taxes continue to soar. Consumer spending by April-May 2011, after adjustment for inflation, was essentially flat.

Inventory accumulation by business has also run its course. With consumers pulling back on spending and consumer confidence again 40% below its 2007 peak, it is not likely businesses will add to inventories in 2011 in expectation of more consumer spending that does not appear will be forthcoming.

Residential housing, and its close cousin commercial property, are so low they probably will not decline further appreciably. Nor will they improve, on the other hand, to offset faltering sectors of the economy elsewhere.

On the jobs front, several strongly negative signs have appeared thus far in 2011. More than 400,000 workers left the labor force in the first quarter. Only a net 14,000 full time workers were added between December and May. Many of the private sector jobs gains have been part time and temp workers. In May only 54,000 jobs were added to the economy, barely covering a third of new entrants to the labor force. Half the job creation comes from small businesses in the US, and recent surveys conducted by the National Association of Independent Business, the trade group, show more small businesses are now planning to cut payrolls than expand them in the months ahead. The May survey showed the worst hiring prospects since last September 2010. Meanwhile, state and local governments layoffs have continued to rise at around 25,000 a month. That’s more than 300,000 a year, a figure that will no doubt go higher over the course of this year. All this before the federal government starts major layoffs later in 2011 and 2012 when budget cuts are implemented in earnest.

Meanwhile, total business spending on equipment and structures has hardly grown, with the latter offsetting the former. The largest US corporations continue sitting on their $2 trillion in cash and liquid assets and refuse to invest in the US to create jobs. And all levels of US government—state, cities, counties, school districts, and the Federal government as well—are engaging in spending cuts this year and deeper cuts most likely next year, which will further negate an already deteriorating economic recovery. In short, there is little if anything on the economic horizon to suggest any source for renewed economic growth and recovery. In fact, quite the opposite.

Who Benefitted From the Obama Recovery?

So who benefited from the $2 trillion in total tax cuts, government spending, direct bailouts, and the more than $9 trillion in Federal Reserve cash injections?

In the two years since the Obama ‘recovery’ began, stocks of the largest S&P 500 corporations have more than doubled in value from $6 trillion to $12.3 trillion. It has been the biggest stock value run-up since 1982. Also the fastest in 60 years. Bonds have done even better. High yield grade bonds rose 20% in price in 2009, followed by a 57% increase in 2010, and a projected additional 25% rise this year. No wonder the number one demand of wealthy investors and households has been to extend the Bush tax cuts on capital incomes another two years. The demand to making the Bush tax cuts permanent in 2012, just before the November elections, will remain number one on the wish list of the wealthy and their corporations. All the talk about deficits and debt reduction is but a secondary objective, to make everyone else pay, in order that they may continue their tax cuts.

Corporate profits have also benefited nicely from the recovery. They have risen at double digit rates of increase for the last seven quarters. Total corporate profits are now $200 billion higher than they were at their peak in 2006, at $1.7 trillion. And that does not count another $1 trillion multinational corporations admit they are holding in their offshore subsidiaries. Some independent sources estimate this offshore profits hoarding are as high as $1.5 trillion. The historic average rate of return for profits in the US has been around 10%. Yet profits rose 243% in 2009 and another 61% in 2010. Profit margins are at an 80 year high, driven not so much by increased sales as by constant cost cutting—which means layoffs, reduced benefits, lower wages, and fewer hours of work.

Corporations continue to sit on their $2 trillion cash hoard, and this writer predicts they will spend most of it not on jobs but on stock buybacks, higher dividend payouts, mergers and acquisitions of competitors, and, on speculation in derivatives and swaps, foreign currencies, and the like—all of which create no jobs whatsoever and in many cases will mean fewer jobs.

The CEOs of S&P 500 companies have also done quite well under Obama’s recovery. They have seen their compensation double, as stock prices of their companies on average have doubled and their stocks awards constitute 53% of their total compensation. Not least, the chiefs of the big banks are back with handsome bonuses, enjoying in 2010 total pay hikes of 36%.

Meanwhile, real earnings continue to fall for 90 million workers and middle class households, foreclosures approach 10 million going to 13-14 million, and banks seize homes at a rate of almost 100,000 a month. 16 million homeowners confront negative equity. Having already experienced the destruction of their pension plans, replaced with 401ks that provide less than half a normal pension, private sector workers are now giving up their deferred future social security wages, through Obama’s payroll tax cuts, so they can pay for rising gas and food prices. Public employees have fared no better, now having their pensions taken away as well as the right to collectively bargain on benefits in general. Meanwhile, hundreds of thousands of teachers are laid off with hundreds of thousands more coming each year in order to balance state budget deficits they didn’t cause. Not least, 24 million workers still remain without jobs almost four years now after the recession and more than two years since the ‘Obama recovery’ officially began.

And the double dip looms on the horizon.…

Jack Rasmus

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