The Weakest U.S. Economic Recovery in Generations
The economy has been in a slow recovery for the past five and a half years. It’s the weakest post-recession rebound in generations. The Commerce Department’s latest revision of the fourth quarter GDP shows that nothing much has changed, as I will discuss below, even though there was some brief optimism last year when the third quarter GDP hit 5%. But that didn’t last.
Meanwhile, winter economic reports for retail sales, manufacturing and capital investment point to a weaker first quarter, perhaps only around 1% growth in GDP. And Wall Street is talking about a possible profits recession, with expectations of a 2-3% drop in corporate earnings for the first half of 2015.
Globally, things are even worse. Europe, Japan, and Russia are all in recession or near it, and all are flirting with outright deflation. China’s formerly red-hot economy is also faltering. Japan doubled-down on quantitative easing late last year, while Europe started QE in a big way this year. Financial risks have definitely heightened.
In light of all this, the stock markets are struggling so far this year. Investors are nervous, as well they should be. Outflows from equity mutual funds and ETFs this year are the heaviest they’ve been since early 2009 at the depth of the Great Recession.
Historically, after deep recessions, the economy comes roaring back with GDP growth of 4-5% or more. But as we all know now, this time is different. By some calculations, GDP is 10% – or nearly $2 trillion – below its long-term trend, and overall jobs are lagging by 8 to 10 million.
Government entitlement transfers pay people not to work. Family breakdown has created a poverty trap for the lowest economic groups. Upward mobility is lagging, so fewer people are moving to where the jobs are. And the government has attacked the high-end movers and shakers with tax hikes and overregulation.
Unfortunately, a damaging business psychology prevails within the current administration that has led to more businesses closing down than starting up – for the first time in US history. The Obama crowd believes success must be punished and that redistribution is the way to solve inadequate growth and income inequality. With that said, let’s look at some of the latest economic reports.
U.S. Economy Continues to Disappoint in Most Reports
The Commerce Department reported that the fourth quarter GDP was up 2.2% (annual rate), unchanged from the previous estimate in February. The pre-report consensus was for an increase to 2.4%, so the report was considered another disappointment. For all of 2014, GDP rose by 2.4%.
The overall picture last quarter was mixed, with consumers spending at the fastest pace in several years, but with business investment decelerating and government outlays falling. As a result most estimates for growth in the first quarter of 2015 have been trimmed to a range of 0.9% to 1.4%.
The government also reported that after-tax corporate profits fell at a 1.6% rate in the fourth quarter, as a strong dollar dented the earnings of multinational corporations. For all of 2014, profits dropped 8.3%, the largest annual drop since 2008.
Gallup’s Economic Confidence Index, which had been rising since last August as gas prices fell, has been trending lower this year. That is a reflection of slower than expected growth so far in 2015 and decreasing expectations for the rest of this year.
Elsewhere, housing starts tumbled in February. The cold, snowy weather was the main reason since the declines were much deeper in the Northeast and the Midwest regions, as compared to the South and the West regions where the cold weather was less of a factor.
Housing starts in February fell to 897,000 units (annual rate), down from 1.081 million in January. The pre-report consensus was for 1.041 million units. In addition to the weather, many locally-based homebuilders have been restrained by difficulty in obtaining construction loans.
Finally, as most readers know, consumer spending makes up approximately 70% of GDP. Given that, it is always important to gauge the forward expectations of U.S. consumers. With the plunge in gas and energy prices since last summer, U.S. consumers have more cash in their bank accounts.
But as I have recently discussed, many American families have chosen to save most of that cash rather than spend it. It is obvious that American consumers are troubled by what they see as the future of the economy and jobs, despite the improvements in the labor market in recent months. It is my opinion that consumers are also troubled by what they continue to see coming out of the Obama administration in terms of more and more onerous regulations.
While not directly related to the economy, I think consumers are also really scared by President Obama’s unyielding quest to strike a nuclear deal with Iran, despite lopsided polls showing huge public disapproval. Whatever the reasons, consumer expectations have gone into a nosedive since the end of last year. This is definitely not a good sign for the economy.
Some Interesting Rasmussen Surveys
According to a Rasmussen Survey in regards to last year’s income tax, 47% of adults now expect they’ll get a refund this year, up from 43% in February, while 20% expect to owe the government money. Some 20% predict that they will break even, while 13% are not sure.
An estimated 70% of Americans will file their 2014 tax returns electronically this year, up slightly from 68% in 2013 and 63% the previous year. Only 18% will file by mail, while 12% are undecided.
In another set of polling, Rasmussen found that the IRS has a growing PR problem. 50% of likely U.S. voters don’t trust the IRS to fairly enforce tax laws. On the other hand, 31% do trust the IRS to enforce the laws fairly, but 19% are not sure.
Some 64% of Republicans and 56% of Independents don’t trust the IRS – whereas only 32% of Democrats feel that way. 50% of all voters surveyed view the IRS unfavorably, with 25% very unfavorable. This is actually an improvement over last year.
Men, especially those age 40 and over, are more likely to distrust the IRS than women and younger voters are. 69% of political conservatives do not trust the IRS to fairly enforce tax laws. Just 39% of moderates and 34% of liberals agree.
Interestingly, Rasmussen found that government employees are just as likely as those employed in the private sector to distrust the IRS.
The IRS definitely has some serious taxpayer service issues. The head of the IRS acknowledged recently that it has answered or returned less than half of taxpayer telephone calls in the last year because of its relatively new responsibilities policing Obamacare – this despite adding over 16,000 new agents for Obamacare alone.
The IRS’ image problems also stem in part from the lingering questions over its targeting of Tea Party and other conservative groups. Most voters have said in surveys since the agency’s rogue activity was first disclosed in spring 2013 that it was criminal and politically motivated. 58% said it’s likely that President Obama and/or his top aides were aware of the IRS’ actions.
Most voters also think it’s likely that the IRS deliberately destroyed e-mails about its investigations of Tea Party and other conservative groups to hide its criminal behavior. Two-out-of-three voters believe IRS employees involved in these investigations should be jailed or fired, or both.
Gary D. Halbert is the president and chairman of Halbert Wealth Management, Inc. His Forecasts & Trends Weekly E-Letter may be obtained free of charge by subscribing at www.halbertwealth.com