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Is The Economic Recovery Stalling? |
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FORECASTS & TRENDS E-LETTER IN THIS ISSUE: 1. Bond Auctions in Spain and France Just OK 2. Fears Rise That the US Economy is Faltering 3. Fed: Is QE3 Really Off The Table? 4. 5.4 Million Join Disability Rolls Under Obama Overview Economic reports in recent weeks have been disappointing overall, and there are growing concerns that the economic recovery may be slowing following 3% GDP growth in the 4Q of last year. As I have written in previous weeks, the 3% GDP number for the 4Q was largely buoyed by inventory rebuilding, which is believed to have slacked off considerably in the 1Q of this year. Thus, all eyes will be focused on this Friday’s first report on 1Q GDP. Only a month or so ago, some worried that the 1Q GDP number could come in below 2% due to the slowdown in inventory rebuilding. But as you’ll read below, most pre-report estimates for 1Q GDP are north of 2%. Assuming Friday’s GDP number comes in above 2%, I don’t expect too much of a reaction in the markets. A number below 2% would likely be quite negative, while a number of 3% or more would be a positive surprise. In any event, I will analyze the GDP report in my blog on Friday. Whatever the GDP number is on Friday, there is a feeling that the economic recovery is stalling a bit. Some of the same spoilers that interrupted the recovery in 2010 and 2011 have emerged again this year, raising fears that the winter’s economic strength might dissipate in the spring and summer. In addition, the Fed Open Market Committee is meeting today and tomorrow. Since we won’t see the policy statement from the meeting until tomorrow, we can only speculate as to whether the Fed discussed any new stimulus at this meeting. I’ll give you my thoughts below. Finally, a record 5.4 million workers and their dependents have signed up to collect federal disability checks since President Obama took office. Many unemployed apply for disability benefits as soon as their unemployment benefits run out. There are now a record 10.8 million Americans on disability – double the number since Obama took office. Before we get into those discussions, I will give you a brief update on the outcome of the debt auctions in Europe last week. In a nutshell, the auctions went a little better than expected. Bond Auctions in Spain and France Just OK The good news is that Spain and France were able to sell all the government bonds they wanted to sell at last Thursday’s debt auctions. The bad news is that the rate on Spain’s 10-year bonds rose to near 5.8%, up from 5.4% in January. At least the rate didn’t climb over 6% as it did in the secondary market early last week, as many feared. However the rate did rise to 5.9% in the secondary market just after the auction. There was one other worrying note to the auction. Spanish banks, fresh with cheap money from the ECB, were the biggest buyers of the bonds, along with other institutions, while foreign investors continued to reduce their holdings of government securities. While the auction was mildly better than expected, Spain is far from being out of the woods. Italy’s next big bond auction is this Friday. There are concerns about that auction as well. Expect the European debt crisis to continue to make news. Country after country in southern Europe is struggling with debt and austerity measures which are driving their economies into recession. France’s president Nicholas Sarkozy appears to be on his way out, to be replaced by a socialist candidate who promises to reverse some of the austerity measures. The Dutch government appears to be breaking up for similar reasons. The bottom line is that the European debt crisis is ongoing and may serve as a lid on global equity prices for some time to come. Fears Rise That the US Economy is Faltering As noted above, the US economic recovery is facing some stiff headwinds. Those include high gasoline prices, the recession and higher interest rates in Europe and the recent disappointing unemployment numbers in the US, just to name a few. The apparent slowdown in the recovery recently is in part due to the unusually warm winter, which served to pull economic activity forward in January and February, thus making March and April so far look softer. With this analysis, some in the mainstream media concluded that we don’t have a problem with the economy. Maybe so, but the recovery has had an uneasy feeling about it recently. The International Monetary Fund (IMF) held its spring meeting in Washington at the end of last week, and it was clear from comments made by the central bankers that they have concerns about the US recovery slowing down. Christine Lagarde, managing director of the IMF said: “There is a light recovery blowing in a spring wind with dark clouds on the horizon.” The IMF’s chief economist, Olivier Blanchard added: “An uneasy calm remains. One has the feeling that any moment, things could well get very bad again.” He is particularly concerned that the ongoing recession in Europe will have negative effects on the US recovery. Treasury Secretary Geithner was trotted onto the Sunday talk shows on April 15 and even he acknowledged that the recovery has been slow of late and cautioned that headwinds remain. There’s a real feeling of concern out there when even the White House admits it. Given that, let’s take a look at some of the latest economic reports. Housing reports released last week were weaker than expected, leading many forecasters to predict a further drop in home prices later this year. Industrial production was flat in March for the second month in a row, and below pre-report expectations. Construction spending fell 1.1% in the latest report. Weekly initial claims for new unemployment benefits were significantly higher than expectations over the last two weeks at 380,000 and 386,000 respectively versus 357,000 in the last week of March. The initial claims report for the third week in April will be out on Thursday, and the pre-report consensus is for a number of 373,000. I think that number would still be considered high. The March unemployment report earlier this month showed that only 120,000 new jobs were created last month, down sharply from 285,000 and 233,000 respectively during the two previous months. All this led numerous forecasters to predict that the national unemployment rate for April will rise above the 8.2% mark for March. All the news was not negative, however. Retail sales rose a better than expected 0.8% in March. The index of leading economic indicators was up 0.3% last month. The ISM manufacturing index climbed a point to 53.4 in March. And building permits were up a better than expected 4.5% in March. Of course, this Friday’s 1Q GDP report is critically important. Of the 50 economists surveyed by Blue Chip Economic Indicators, the predictions ranged from a high of 2.9% to a low of 1.8% with an average of 2.2% (annual rate). As this is written, the pre-report consensus is for a rise of 2.5%. The 1Q GDP report will be released on Friday at 8:30 EDT. As usual, I will analyze the GDP report in my blog on Friday – click here to sign up if you haven’t already – it’s free). Fed: Is QE3 Really Off The Table? The Fed Open Market Committee (FOMC) that sets monetary policy is meeting today and tomorrow in Washington. The markets always pay a lot of attention to the policy “statement” which is released just after the meeting ends in the early afternoon. That will happen tomorrow, and I don’t expect any significant changes to the statement this time. To get the details on what the FOMC members actually discuss in these closed-door meetings, you have to wait until the “minutes” of the meeting are released. For example, the minutes from the March 13 meeting were released on April 3. Warning: these minutes are very boring, but I have to look at them – at least the policy sections (good thing I’m a speed-reader). When the latest minutes came out on April 3, there was a fairly broad consensus that the FOMC had ruled out any further quantitative easing, or QE3. In fact it was largely this consensus on QE3 that sent the stock markets lower earlier this month. I didn’t read the March 13 minutes that way. In my view, the FOMC once again left all options on the table. The specific policy options were unchanged from the previous meeting: 1) Keep the Fed Funds rate near zero at least until late 2014; and 2) continue to extend the maturities of existing securities (“Operation Twist”). But then there is the following paragraph that was unchanged from the previous meeting: “The Committee also stated that it is prepared to adjust the size and composition of its securities holdings as appropriate to promote a stronger economic recovery in a context of price stability. A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run.” [Emphasis added.] This language clearly suggests, to me at least, that QE3 is still an option. As I discussed at length in my March 13 E-Letter, the Fed is still very concerned about the economic recovery which, as discussed above, appears to be weakening. It will be very interesting to see what the Fed has to say about the recent pace of the economy in its policy statement tomorrow. Following the last several FOMC meetings, the policy statement noted that the US economy has been expanding moderately. For example, here are excerpts from the March 13 policy statement: “Information received since the Federal Open Market Committee met in January suggests that the economy has been expanding moderately. Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated. Household spending and business fixed investment have continued to advance.” [Emphasis added.] Here are the key points to watch for in tomorrow’s Fed policy statement. It will be very important to see if the Fed alters this language to note that the economic recovery appears to be slowing down in the policy statement tomorrow. It will also be important to see if the Fed alters any of its prior language regarding keeping the Fed Funds rate near zero into late 2014, or if it changes the language regarding Operation Twist. If the Fed fails to acknowledge that the economic recovery is slowing down in the statement tomorrow, then I think it’s safe to assume that QE3 is not going to happen just ahead. On the other hand, if the Fed does acknowledge that the economy is slowing down, then I would not rule out a decision to enact QE3 (or extend Operation Twist) at the June 19-20 FOMC meeting. Unfortunately, we won’t see the minutes from this week’s FOMC meeting until the middle of next month. Only then will we know what the FOMC members really talked about today and tomorrow. As usual, I will write about this when the minutes are made public (most likely in my blog on May 18 – click here to sign up if you haven’t already – it’s free). And one final note on the Fed: Don’t automatically believe the media’s take on the Fed’s policy statement tomorrow. The financial talking heads often misinterpret the Fed’s policy statements. Keep that in mind as you hear the spin tomorrow following Chairman Bernanke’s post-meeting press conference. It will be very interesting to see if he even hints at more QE – I doubt it. 5.4 Million Join Disability Rolls Under Obama
Since the recession ended in June 2009, the number of new enrollees to Social Security's disability insurance program is twice the job growth figure as you can see in the chart at left. In just the first four months of this year, more than 725,000 put in disability applications, and more than 539,000 (74%) were accepted. As a result, by April there were a total of 10.8 million people on disability, according to Social Security Administration data released last week. Even worse, data released by the White House stated that “…workers on SSDI rarely return to the labor force.” [Emphasis added.] To me this is the saddest part of this story: once you go on disability, you’ll probably never get off of it. This is straining already-stretched government finances while posing a long-term economic threat by creating an ever-growing pool of permanently dependent working-age Americans. Even after accounting for all those who've left the disability rolls – some 700,000 drop out each year mainly because they hit retirement age or died – that’s up 53% from a decade ago. The biggest factor in the recent surge is the slow pace of the economic recovery after the severe recession. That has kept the unemployment rate above 8% and created an enormous pool of long-term unemployed and discouraged workers. More than 5 million people have been jobless for 27 weeks or more, nearly twice the previous high set in 1983, according to the Bureau of Labor Statistics. Boston College's Center for Retirement Research says that a lot of unemployed people apply for disability as soon as their unemployment insurance expires. The number of disability applications last year was up 24% compared with 2008, according to Social Security Administration data. The explosive growth in disability enrollment also helps explain some of the drop in the labor force “participation rate” – the share of working-age people who have or are looking for a job. The participation rate has fallen to 63.8% compared with 65.7% at the start of Obama’s term. Ironically, this drives down the unemployment rate, which simply measures how many people are looking for work but haven't been able to find it. When people quit looking or sign up for disability benefits, they no longer count as unemployed. As noted above, the problem is that few people who get on disability will ever participate in the labor force again. As a result, the rapid increase in the number of disabled is a huge drag on the economy and will be for a very long time. How Do So Many (74%) Qualify? At this point, you are probably asking, how did so many of the unemployed qualify? As noted above 74% of all disability applicants were accepted so far this year. Has some mysterious force caused more people to become disabled than ever before? Hardly. No, given the fact that unemployment has remained so high for so long, more and more Americans are seeing their unemployment benefits expire. Many view disability insurance as an extension of their unemployment benefits. In reality, many applicants are turned down during the initial medical screening process, especially those who apply on their own without legal assistance. Increasingly, however, applicants who are turned down initially decide (or are advised) to appeal the decision, which they have a right to do. Also more and more applicants are appealing with the help of lawyers. Apparently, if you get a lawyer, you get accepted pretty much automatically. I’m sure you’ve seen TV ads for such attorneys, usually on late-night TV (what else is new?). Reasons for applying can be as vague as simple “pain and discomfort” or “multiple non-severe ailments” or “mental illness.” These and many other claims are difficult to disprove. According to a study by the National Bureau of Economic Research, many applicants who were denied initially returned with lawyers and claimed different ailments than they cited on the first application. Again, if you get a lawyer, you get accepted virtually automatically. Reform ideas that would cut the ranks of those on disability have been bandied about for years. They include tightening eligibility rules, giving workers more options other than full-time disability and offering tax incentives for disabled workers to stay in the workforce. So far, the reform ideas have spurred little action. So along with a new record number of Americans living in poverty (a topic for another time), we have an all-time high number of Americans on disability. This is a travesty on so many levels! Very best regards,
Gary D. Halbert SPECIAL ARTICLES
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A record 5.4 million workers and their dependents have signed up to collect federal disability checks since President Obama took office, according to the latest official government data. The problem is that discouraged workers who are unemployed are increasingly giving up looking for jobs and taking advantage of the federal disability program.
