IN THIS ISSUE:
1. GDP Growth in the 1Q Was Disappointing
2. The Fed’s Decision & the Press Conference
3. Editorial: A Tale of Two Recessions
4. Reliance on Uncle Sam Hits a Record
5. Unemployment Devastates Savings… and Benefits
Our main topic this week is a new report from USA TODAY which found that Americans depended more on government assistance in 2010 than at any other time in the nation’s history, based on federal data. A record 18.3% of the nation’s total personal income in 2010 was a payment from the government for Social Security, Medicare, food stamps, unemployment benefits and other programs.
Yet before I get into our main topic, there has been some important news on the economy and the Fed since last week’s letter. Last Thursday’s initial report on 1Q GDP was considerably weaker than expected. The government reported that 1Q GDP rose at an anemic annualized rate of only 1.8%, as compared to 3.1% in the 4Q of 2010.
The Fed’s monetary policy committee met last week and decided that the latest round of quantitative easing (QE2) will end in June as scheduled, and that no new QE3 is in the works. They also announced that short-term interest rates will remain near zero for an extended period. And Fed Chairman Bernanke continued to maintain that he believes rising inflation is temporary. I’ll have more details below.
Following the sections on the economy and the Fed, we will dive right into the fact that more Americans are on the government dole than ever before. I think you’ll find some of the statistics fascinating – and alarming, of course. Let’s get started.
GDP Growth in the 1Q Was Disappointing
The Commerce Department reported last Thursday that the US economy grew at an annualized rate of only 1.8% in the 1Q, down from 3.1% in the 4Q of last year. The 1.8% figure was well below the pre-report consensus of 2.4%, so it was quite a disappointment. This was, however, the “advance” GDP estimate which may change going forward. The second estimate of 1Q GDP will be released on May 26.
According to the Commerce Dept., the increase in real GDP in the 1Q primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, and nonresidential fixed investment that were partly offset by negative contributions from federal government spending, state and local government spending and imports, which are a subtraction in the calculation of GDP.
Personal consumption expenditures increased 2.7% in the 1Q, compared with an increase of 4.0% in the 4Q. Durable goods increased 10.6% in the 1Q, compared with an increase of 21.1% in the 4Q. Nondurable goods increased 2.1%, compared with an increase of 4.1% in the 4Q. This information helps explain why the economy decelerated sharply in the first three months of this year. Economists are scurrying to dial back their GDP forecasts for the rest of the year.
The price index for gross domestic purchases, which measures prices paid by US residents, increased 3.8% in the 1Q, compared with an increase of 2.1% in the 4Q. Excluding food and energy prices, the price index for gross domestic purchases increased 2.2% in the first quarter, compared with an increase of 1.1% in the 4Q.
In other reports, the Consumer Confidence Index edged slightly higher in April to 65.4 from 63.8 in March. But remember that the Index plunged in March from 72.0 in February, so consumer confidence remains quite low. With food and gasoline prices rising sharply, we should not be surprised if the Index moves lower in May.
The Index of Leading Economic Indicators (LEI) increased 0.4% in March and a revised 1.0% in February. Retail sales in March rose 0.4% but were well below the pre-report consensus. Industrial production rose 0.8% in March, slightly better than expected.
There was some modest good news on the housing front. Existing home sales grew to 5.1 million units in March from 4.92 million units in February. Housing starts rose to 549,000 units in March, as compared with 512,000 in February. But keep in mind that housing starts are down 76% from their peak of 2.27 million in 2006.
As for home foreclosures, the latest news is still bleak. March home foreclosures were up 7% over February levels according to RealtyTrac. The company noted that foreclosure filings -- default notices, scheduled auctions and bank repossessions -- were reported on 932,234 properties in the 1Q, a 16% increase from the 1Q of 2010. One in every 138 US housing units received a foreclosure filing during the quarter.
On the unemployment situation, the news is mixed. While the official unemployment rate fell to 8.8% in March, weekly claims for unemployment benefits have since risen above 400,000 in the last three consecutive weeks. For the week ended April 23, initial claims were 429,000. Jobless claims above 400,000 are generally considered a sign of a contracting job market, not a growing one.
In summary, last week’s surprising GDP report served as a wake-up call for most economists and analysts. As noted above, most are hurriedly downgrading their forecasts. Gone are the forecasts of 4-5% growth seen earlier this year. It will be most interesting to see the May issue of Blue Chip Economic Indicators which surveys the top 50 economists and analysts around the country. Earlier this month, the consensus forecast was growth of 2.9% for all of 2011. We’ll see how much that comes down when I get my next issue around the 12th of May.
Whatever the economists say, this economy is extremely sensitive to food and energy prices. The higher they go, the lower will go consumer confidence and spending, which accounts for 70% of the economy.
The Fed’s Decision & the Press Conference
The Fed Open Market Committee (FOMC) met last Tuesday and Wednesday to set monetary policy for the next six weeks or so. A lot was riding on this meeting. Would there be QE3 when QE2 ends? Would short-term interest rates continue to be held near zero? Would Bernanke continue to insist that rising inflation is “transitory” (short-term in nature)? Would he announce any plans to support the sagging US dollar?
The official FOMC policy statement held some answers. It noted that QE2 would end on schedule in June, and no QE3 has been planned. Due to the weak economic recovery and continued high unemployment, the Fed Funds rate would be held near zero for an “extended period.” The statement acknowledged that inflation has risen over the last year, but continued to characterize it once again as “transitory” – as if it’s just going to go away sometime fairly soon. There was no acknowledgement of the falling US dollar in the statement.
Yet there was a big wrinkle in last week’s FOMC meeting. After the meeting concluded, Fed Chairman Ben Bernanke held a press conference. This was not a surprise as it was announced some weeks ago that Bernanke had decided to hold these press conferences about four times a year, even though no Fed Chairman before him has done so. There was a lot of anticipation.
I read numerous columns on the day after the Bernanke press conference, and the reviews were NOT pretty. The most common concern among the various columnists was in regard to Bernanke’s stubborn position that the current rise in inflation is “transitory.” In the span of the 45-minute press conference, gold prices soared $24 an ounce to another new record high ($1,526), even though Bernanke never once spoke the word “gold.”
Another concern is that many believe the massive government stimulus spending and the Fed’s huge quantitative easing are not helping the economy or creating new jobs. Bernanke obviously believes otherwise. But he did have to assure the markets that the Fed will act if inflation becomes a bigger problem. Apparently, he thinks he can thread the needle and know when it’s time to hit the brakes. I have my doubts.
A Tale of Two Recessions
The following editorial was in Investor’s Business Daily last Friday. On most items that I reprint, I try to offer some comment or opinion. This one, however, seems to speak for itself:
QUOTE: A Tale Of Two Recessions And Two Presidents
Posted 04/28/2011 07:10 PM ET
Growth: It's been nearly two full years since the recession officially ended, and the economy is still struggling to get off the ground. It didn't have to be this way. When the Commerce Department released its estimate for first-quarter growth — a meager 1.8% — President Obama's chief economic adviser, Austan Goolsbee, at least conceded that "faster growth is needed to replace the jobs lost in the downturn."
And granted, the economy needs to expand by at least 2.5% just to keep up with growth in the labor force. So at 1.8%, we're essentially losing ground, a fact that last week's 429,000 initial jobless claims underscores. But what Goolsbee didn't acknowledge is that the economy could be growing at a much faster rate, and would be if it weren't saddled with Obama's reckless policies.
How do we know this? Compare the two worst post-World War II recessions. Both the 1981-82 and the 2007-09 downturns were long (16 months and 18 months, respectively) and painful (unemployment peaked at 10.8% in 1981-82 and 10.1% in the last one). What's dramatically different, however, is how each president responded.
Obama massively increased spending, vastly expanded the regulatory state, and pushed through a government takeover of health care. What's more, he constantly browbeats industry leaders, talks about the failings of the marketplace and endlessly advocates higher taxes on the most productive parts of the economy.
In contrast, Reagan pushed spending restraint, deregulated entire industries, massively cut taxes and waxed poetic about the wonders of a free economy. The result? While the Reagan recovery saw turbocharged growth and a tumbling unemployment rate, Obama's has produced neither. Consider:
• GDP. In the seven quarters after the 1981-82 recession ended, the economy cranked out quarterly growth rates that averaged 7.1%. Under Obama, GDP growth has averaged a mere 2.8%. (See chart above.)
• Unemployment. Under Reagan, the unemployment rate had fallen to 7.5% by this point in the recovery. Under Obama, it's still stuck at 8.8%.
• Long-term unemployment. There were far fewer long-term unemployed by this point in the Reagan recovery; just 18% of the unemployed had been without a job 27 weeks or more. Under Obama, that figure is an astonishing 45%.
• Consumer confidence. By this point in the Reagan recovery, the Conference Board's Consumer Confidence Index had hit 100. Today, the index stands at just 65.4.
• Deficits. Under Reagan, the federal deficit was trimmed to 4.8% of GDP by 1984. Under Obama, the deficit is expected to climb to 10.9% of GDP this year.
Obama and his defenders like to say he inherited the worst downturn since the Great Depression and that things would have been worse still had he not acted. But the recession was almost over by the time he took office — and officially over just six months after that.
So while Obama's policies had little to do with bringing an end to the Great Recession, they've had everything to do with producing what is by far the worst economic recovery in the past 70 years. END QUOTE
Reliance on Uncle Sam Hits a New Record
A new report last week from USA TODAY, based on federal data, found that Americans depended more on government assistance in 2010 than at any other time in the nation’s history. The trend shows few signs of reversing, even though the supposed economic recovery is nearly two years old.
A record 18.3% of the nation’s total personal income was a payment from the government for Social Security, Medicare, food stamps, unemployment benefits and other federal programs in 2010. Social Security, Medicare, Medicaid and unemployment insurance accounted for 80% of safety-net spending in 2010.
Actual wages accounted for the lowest share of personal income – 51.0% – since the government began keeping track in 1929. The income data show how fragile and government-dependent the economic recovery is after a recession that officially ended in June 2009. This report also has most economists dialing back their forecasts for growth the rest of this year and for 2012, as noted above.
While the USA TODAY report was focused on 2010, the wage decline has continued into 2011. Wages slipped to another historic low of 50.5% of personal income in February. This decline is partly offset by President Obama’s temporary rollback of the Social Security payroll tax, which has had the effect of increasing income in 2011. The temporary tax cut puts more money in workers’ pockets and counts as an income boost, even when wages stay the same.
To put this in perspective, from 1980 to 2000, government aid was roughly constant at 12.5% of America’s total personal income. The sharp increase since then to 18.3% in 2010 – especially since the start of 2008 – reflects several changes: 1) the expansion of health care and federal programs generally; 2) the aging population; and 3) the weak economic recovery and continued high unemployment.
Here’s another way to look at this. Americans on the government dole received an average of $7,427 each in benefits in 2010, up from an inflation-adjusted $4,763 in 2000 and $3,686 in 1990. Thus, benefits have more than doubled in the last 20 years! Keep in mind that the federal government pays about 90% of these benefits.
Unemployment Devastates Savings… and Benefits
As discussed in last week’s E-Letter, total government revenues from personal income taxes are estimated to be $2.174 trillion in the 2011 fiscal year. Now compare that to the $2.3 trillion annual rate of expenditures for transfer/benefits payments in FY2011, and you quickly see that not only are many Americans receiving more in benefits than they pay in taxes, but they are receiving more in total benefits than everyone pays in federal income taxes (more on this in an upcoming E-Letter).
Perhaps most sobering of all is the realization that we’re just now seeing the tip of the iceberg! It’s frightening to think that the oldest of the Baby Boomers are just now starting to retire. Remember that 77 million people were born from 1946 through 1964, and only the oldest of these Baby Boomers will turn 65 this year. Thus, the number of Americans at or near retirement will go up every year for at least the next decade. As that happens, everyone knows that the cost of Social Security and Medicare will start to explode.
As a financial advisor, I also think about the other effects of continued high unemployment and dependence upon government aid. For example, those who are unemployed are not able to participate in 401(k) plans to fund their retirement. In fact, many of those who are “underemployed” (those working part-time or in full-time jobs that are below their qualifications) are finding it difficult to make 401(k) contributions in light of lower wages and increasing prices of food and energy.
As we see more and more unemployed going beyond the limits of unemployment compensation, we’ll also likely find that they will begin to draw upon their IRA and 401(k) balances for daily living expenses, if they haven’t already done so. Doing so removes assets from a tax-advantaged account that will be difficult, if not impossible to replace. However, when it comes down to feeding your family or keeping your 401(k) intact, we all know which option is going to win.
And let’s not forget that while people are out of work, they are not making contributions to Social Security, which will have a negative effect on their eventual level of benefits. Those who accept jobs at lower wages than they previously were paid are also likely to see Social Security retirement benefits drop as a result of lower contributions.
Retirement issues aren’t the only stresses being experienced by those who are out of work. In addition, there’s the matter of college education for children. With federal loans and grants becoming harder to get, funding a college education falls more and more upon the family. The same goes for paying for care of elderly parents.
For a generation that hasn’t saved enough for retirement in the first place, these additional stresses on the ability to contribute to, or taking early withdrawals from, retirement accounts will result in more problems later on as individuals realize that they do not have enough money put back for a comfortable retirement. With more and more Boomers retiring each year for at least a decade, the problem will only get worse. You’d think we would be hearing a lot more about it.
Conclusions & Happy Mother’s Day
The latest GDP report showing growth of only 1.8% in the 1Q vs. 3.1% in the 4Q was a real disappointment, as discussed above. What I didn’t point out is the fact that it makes the odds of a double-dip recession higher. Hopefully, that is not where we’re headed, but as investors we need to keep in mind that the odds have increased.
The Fed’s decision to end quantitative easing in June was no surprise. But no one knows what will happen when the Fed stops buying about $85 billion of Treasury bonds a month. Will interest rates go up? Will the stock market – the big winner as a result of QE2 – go down as liquidity contracts? And how about the dollar – will its slump continue?
The fact that Americans’ dependence on government benefits has hit an all-time record, and continues to go up, should concern all of us. Yet we heard sparingly little about it in the mainstream press and nothing at all from the White House or members of Congress. You would think it’s just fine with them. Never mind that we can no longer afford it.
Polls consistently show that most Americans want government spending cut. But the polls also show that most Americans do not want entitlements cut. As I pointed out last week, it is now impossible to significantly bring down our deficits without cutting both. Politicians on both sides of the aisle don’t have the will to do it.
I believe this will end in another crisis. The question is when. The timing is not in our control. Sadly, it will be decided by the foreigners who buy most of our debt and the bond market, neither of which we can control.
To end on a positive note, let me wish all of you mothers out there a HAPPY MOTHER’S DAY. My Mother passed away over a decade ago, so my focus on Mother’s Day is my wife Debi who is one of the best Mothers on the planet, my business partner for over 25 years and most importantly, my best friend. We just celebrated our 25th wedding anniversary. Lucky me!
And finally, let me extend my congratulations to, and deep appreciation for, all those who participated in the raid on Osama bin Laden’s compound in Pakistan which resulted in his death, and especially to the members of Navy SEAL Team Six. President Obama gets credit as well.
Very best regards,
Gary D. Halbert
Record Number of Americans get government help
Bernanke Rolls the Dice on Unemployment
Bin Laden death marks turn in US history
"Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend any product or service advertised herein, unless otherwise specifically noted."
Forecasts & Trends is published by ProFutures, Inc., and Gary D. Halbert is the editor of this publication. Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgment of Gary D. Halbert and may change at any time without written notice, and ProFutures assumes no duty to update you regarding any changes. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Any references to products offered by Halbert Wealth Management are not a solicitation for any investment. Such offer or solicitation can only be made by way of Halbert Wealth Management’s Form ADV Part II, complete disclosures regarding the product and otherwise in accordance with applicable securities laws. Readers are urged to check with their investment counselors and review all disclosures before making a decision to invest. This electronic newsletter does not constitute an offer of sales of any securities. Gary D. Halbert, ProFutures, Inc. and all affiliated companies, InvestorsInsight, their officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Securities trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results.
05-03-2011 3:55 PM
Gary D. Halbert