In a response to the post, Should We Upgrade Our Assessment of Obama’s Economic Record?, I wrote:
I think the Obama economy was a non-traditional economy so evaluating it using traditional quantitative measures will be quite difficult. I suspect some economists would go so far as to describe the Obama economy as a “grand experiment”. Let me highlight some of the non-traditional aspects of this economy that separate it from past traditional economies.
- The combination of zero interest rates and quantitative easing is not something we have done before. Other countries tried this and got hyperinflation. This was America’s first time with this “experiment” and we got low inflation. This tactic was extremely risky. We got lucky!
- For the last eighteen years, American companies have consistently reported better earnings with almost no growth in sales. An underlying theme for this earnings growth was various financial engineering schemes. Instead of investing in capital equipment or employees, we invested in stock buybacks. There is nothing like zero interest rates to encourage stock buybacks and prop up the stock price. Traditionally American companies earnings grew because of productivity growth and great products.
- Another interesting divergence with tradition was the sector driving GDP growth. In the Obama economy, it was the growth of health care and almost no growth of traditional areas, such as home building and retail. For a consumer-driven economy like the United States, this is probably a bad omen for economic growth.
So we had a non-traditional economy, what difference does it make? The policies in the first two years saddled America with a lot of debt and slow economic growth. The solution to this problem is faster economic growth. So why did the Obama administration fail to enact policies that unleashed the animal spirits of the economy? They had six years to figure this out. As James Carville once said its “the economy, stupid“. The Trump administration figured this out in less than two years. It won’t take too many quarters of over 3% GDP growth to come to the conclusion that the “grand experiment” was a policy failure that fortunately we can overcome. The good news is that the “grand experiment” is over and we can go back to being America again. The question that goes to the heart of the question on Obama’s economic record is, am I better off than eight years ago? Am I better off than two years ago? Yes, I am. Real economic growth with low inflation solves a lot of problems.
I struggle to explain the current economy. Gone are the days of inventory-driven booms and busts. We hated the layoffs but at least the economic boom was robust and benefited everyone. It was the rising tide that lifted all boats. Now it seems that neither good or bad economic news affects the economy. We have several years of lousy retail sales growth that does not seem to matter. We are “experiencing the strongest streak of employment growth since the 1990’s” but that does not seem to matter. Almost all of our economic and job growth comes the health care sector but that does not matter. Even lower prices for gasoline do not matter. This is not my father’s economy. The doldrums we are experiencing seems to have more in common the crisis of confidence that President Carter spoke about in his “Malaise” speech but with one significant difference. Based on recent history it looks like the traditional correlation between jobs and economic growth is considerably weaker than in President Carter’s economy. I am not alone in my confusion. Lance Roberts voices similar concerns in his article, Is There A Problem With The BLS Employment Reports?
IF we were truly experiencing the strongest streak of employment growth since the 1990’s, should we not be witnessing:
- Surging wage growth as a 4.9% unemployment rate gives employees pricing power?
- Economic growth well above 3% as 4.9% unemployment leads to stronger consumption?
- A rise in imports as rising consumption leads to demand for goods.
- Falling inventories as sales outpace production.
- Rising industrial production as demand for goods increases.
Obviously Mr. Roberts was expecting a much stronger correlation between job and economic growth than we are seeing. The more interesting question has to be, why are businesses hiring when it looks like that hiring more people does not translate into growing sales?
Charles Smith shows in this chart the growing disconnect between jobs and economic growth has been going on for a long time.
Over the last forty years we have chosen to become a country less dependent on labor. Part of this decline can be explained that global trade has encouraged countries like the United States to ship low wage jobs to countries with lower labor costs. A good portion of our textile business went over seas for this reason. Ironically this “land of opportunity” has less opportunities for low wage jobs than ever before and an even bigger problem with middle class jobs. Every developed country is desperately trying to hold on to its middle class jobs and, in some cases such as China, increase them. So if you believe financial engineering bubble is over then we are left with growing the economy in a way my father would be comfortable with, growing the middle class by encouraging product development at small and medium size businesses. The heavy hand of government regulations combined with increased cronyism seems to have been more advantageous to the firms that got most of their earnings from financial engineering rather than product development. The millennials and Hispanics need to start sifting through the policies that worked in the past and tweak them for this new generation. So if the health and wealth of America depends largely on the health and wealth of the middle class, what are the competitive advantages that will convince businesses to keep their middle class jobs in America?
Despite low gasoline prices and good employment numbers this economy is not my parent’s consumer driven economy. In my parent’s economy these factors would drive robust, broad based economic growth. In today’s economy it doesn’t. With economic gains focused almost exclusively on health care and auto sales it is fascinating that low gasoline price and good employment numbers have had almost no on the other sectors. This violates everything we have come to expect about America’s consumer driven economy. Since it is not my parent’s economy, what will trigger robust, broad base economic growth if low gasoline prices and good employment numbers will not do the job? With such a “meh” economy, why is the Federal Reserve raising interest rates? The economic fundamentals are still too weak to encourage inflation and higher interest rates traditionally slow down the economy. Despite the changed circumstances it is still reasonable to expect that an interest rate increase will drive the economy into a recession. What is the Federal Reserve worried about that is worse than a recession? Today I saw a quote from Stanley Druckenmiller that possibly explains the consumer driven economy dilemma facing the Federal Reserve.
“The problem with this is when you have zero money for so long, the marginal benefits you get through consumption greatly diminish, but there’s one thing that doesn’t diminish, which is unintended consequences.”
For those folks fascinated by increased health care spending in a stalled economy there is a nice article, Health Spending Unscathed In Shrinking Economy, at the NCPA Health Policy Blog. John Fembup asked the question why is increased health care spending “bad” and increased spending at Wal-mart “good”? Here is my reply.
Historically only a few sectors of the economy have a multiplier effect on the rest of the economy. The two best examples of this is housing construction and the growth of the Goods sector. Most economic recoveries have been led by one or both of these sectors. So when major companies in these sectors report increased sales, this is important economic news. The logic is that if GM, Target, Costco, and Wal-Mart are having good years then it is possible that a broad based expansion is underway.
Historically health care spending had a weak correlation with Personal consumption expenditures(PCE) growth. Until 2014 the Goods sector had a strong correlation with PCE growth. In 2014 the positions changed. Health care spending became the leading contributor to PCE growth and the rest of the PCE sectors look like they were in a stalled economy. Based on this limited data you would have to conclude that increased health care spending does not have a multiplier effect on the economy.
Finally most of the increases in our standard of living can be attributed to innovation and productivity gains in the Goods sector. Health care has a poor record for innovation and productivity gains. The most interesting productivity gain that I have seen in health care was a county project to manage diabetes. It provided better care and lowered costs. If health care acted more like a business then they would adopt a more distributed decision-making organization structure to encourage this type of productivity gain. Health care is inherently a local service requiring local decisions. Instead the government and industry have embraced a more command and control organizational structure that generally gets its productivity gains from economies of scale. Since the Affordable Care Act has not generated any cost savings and has blown every budget, it looks like we got the worst of both worlds, increased centralization with no cost savings. We tried, we failed! It is both sad and exciting to think that if we want to increase our standard of living then it has become imperative that the health care industry innovate and focus on productivity gains. If we want to grow the economy then we have to be smarter about our down health care spending so the sectors that have a multiplier effect can grow.
I was looking at the third estimate for the fourth quarter 2014 GDP by BEA when I decided to take a gander at the GDPNow forecast for this quarter. Yuck! It reminds me of the first quarter of 2014 which started out modestly positive and quickly went negative when the BEA estimates for health care spending were too high. Here is the 2015 GDPNow chart.
It should be interesting to see what the health care spending contribution is for the first quarter in 2015. In the fourth quarter of 2014 the percent change in Personal consumption expenditures(PCE) was 2.98% and health care spending contributed 29% to that gain(.88%). Historically PCE is strongly correlated(.90) to the consumption of Goods and you could model PCE gains with a linear equation based solely on Goods consumption. From 2000 until the beginning of 2014, we can reasonably say that where Goods consumption goes, PCE will follow. Over this same period we find that health care is loosely correlated(.29) to PCE. In 2014 things changed and health care spending became the driving force of PCE. Here is a graph from the BEA site and you cannot help but notice that in 2014 the gains in PCE looks to be strongly correlated to health care spending and goods consumption is now loosely correlated. Considering how important health care spending has become to PCE and GDP gains and the weak Goods numbers reflected in the GDPNow forecast, if health care spending comes in weak or negative like it did in 2014 then we are going to see some really ugly GDP and PCE first quarter numbers.
This week I was trying to get my head what the weak retails sales report for December and the currency freak-out by Switzerland says about the prospective of 2015 US economic growth. Although everyone seems happy about the US economy and jobs I am getting a little worried. This health care driven economy has very short coat tails when you compare it to the more traditional housing driven economy and there is no better example of this than weak retails sales for December despite lower gasoline prices. Despite good GDP growth, good employment numbers, and positive consumer sentiment, the consumer is not spending on goods. The weak retail sales numbers supports a speculation I made in a previous post that the Affordable Care Act is primarily wealth redistribution and every additional dollar spent in health care is a dollar subtracted from retail sales.
Then we have the currency freak-out by Switzerland. As the European Union crisis has deepened, demand for the Swiss Franc has risen. As the Quartz article, Absolutely everything you need to understand what happened to the Swiss franc this week, explains:
A strong franc hurts the Swiss because it makes their exports more expensive for foreign buyers, and the country has a giant export sector.
In the case of Switzerland, exports account for 72.2% of their GDP. To protect Swiss exports In September 2011, the Swiss National Bank set a limit on the amount of strength it would tolerate. Last week they gave up and let the Swiss Franc float. Swiss exporters and the financial markets were not amused. Even though Switzerland is not part of the European Union they have been drug into the European Union problems and have increased the likelihood of a Swiss recession.
The United States has a strong currency but the US economy is not nearly as dependent on exports as Switzerland or Germany. Unfortunately the effects on export dependent companies in the US is the same as it is in Switzerland. When you combine the export weakness with the expected weakness in the oil sector and auto sales, you have to wonder where the retail sales demand will come from. If European deflation is almost a certainty then can the US be far behind. Switzerland is one of the best managed economies in the world and they gave up the currency fight. When you combine weak retail sales, oil demand, auto sales, and housing demand with deflation worries, it makes me wonder how this health care driven economy can grow 3% in 2015.
Ever since the latest GDP report said the economy grew at a 5% rate in the latest quarter I have been thinking of the theme song for the Jeffersons, Movin’ On Up. Surely With 5% growth everyone should be feeling a little wealthier like the Jeffersons. Here are some of the lyrics from that song.
Well we’re movin on up,
To the east side.
To a deluxe apartment in the sky.
Movin on up,
To the east side.
We finally got a piece of the pie.
The irony is that despite 5% growth I do not feel wealthier in 2014 and am pretty sure my wealth in 2015 will diminish even more. So I started exploring the GDP contributions and found that most of the gain in Real Personal Consumption Expenditures(PCE) is attributable to health care(23.8%).This is not too surprising since health care has growing faster than every other PCE category since I started working in 1976. As long as our politicians were unwilling to slow down health care cost increases, it was just a matter of time before it would be number one. What was surprising was that the next three largest contributors were Financial services and insurance(16.3%), Recreational goods and vehicles(14.1%), and Motor vehicles and parts(12.8%). Missing in action were those durable and non-durable stalwarts of clothing, furnishings, food, gasoline, and housing. Obviously this health care economy is a much different economy than the Jeffersons were enjoying in the 1970s. The “Jeffersons” in this economy are definitely not moving on up. That is when I started thinking about my number one financial problem for 2015, health insurance.
In a previous post I mentioned that my grandfathered insurance premium for January 2015 will be $479. This is up 18% from my 2014 insurance premium of $407 and up 54% from my 2011 premium of $311. The lowest cost bronze plan in 2015 would cost me $923. As a person whose last insurance claim was made in the 1990s I think the fair market value for my health insurance is probably around $311 and everything charged above that amount is the equivalent to a wealth redistribution tax. From the perspective of my employer I got a raise since they paid more for my services. Unfortunately for me my raise did not buy clothing, furnishings, or bolster my retirement savings. Instead it went to pay other people’s medical expenses and insurance.
Unfortunately for the Affordable Care Act supporters it is an easy argument to show that income inequality increases when the health care economy is based primarily on redistributing wealth between different parts of the middle class. It did not have to be that way. Reforming health care costs was an essential part of health care reform and an integral part in supporting a growing the economy and creating good paying jobs. Instead we see a health care system that is dominating the economy and is literally sucking the growth out of other sectors of the economy. It looks like we are in a race to the bottom. Milton Friedman would probably have this to say.
A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.
I have a certain fascination with forecasts so on August 1st we shall see if the GDPNow method is better than the professional forecasters. Here is what the Atlanta Federal Reserve site said in the last report.
The final GDPNow model forecast for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2014 was 2.7 percent on July 25, unchanged from its July 17 reading. The first GDPNow model forecast for GDP growth in the third quarter will be released August 1.
I continue to be fascinated with forecasting that errs in only one direction. A couple of days ago I made fun of GDP forecasting in the post, Who Is The Better Forecaster, The Economist Or The Climate Scientist? The good news is that these “scientists” are not building stuff that could hurt us like cars or airplanes. For the last couple of years the initial GDP estimates are consistently too optimistic and the chart below continues that trend. Today I found out that the Atlanta Federal Reserve’s GDPNow forecast is expecting 2.6% GDP growth for the second quarter of 2014. It should not be a surprise to anyone that this estimate is at the bottom of the range for GDP forecasts and will leave us at a negative growth rate for the first six months of the year. For those of you who like to look at the details the Atlanta Federal Reserve has graciously provided the spreadsheet they use to make the GDPNow forecast. Here is the latest forecast from their site.
The GDPNow model forecast for real GDP growth (SAAR) in 2014: Q2 was 2.6 percent on July 10, unchanged from its July 3 value. This morning’s wholesale trade release from the U.S. Census Bureau had no effect on the GDP nowcast after rounding.
I was looking at this wonderful chart from Business Insider and from Bloomberg LP Chief Economist Michael McDonough and wondered who was the better forecaster, the economist or the climate scientist. As we can see from the chart the GDP forecasts for the last couple of years are particularly bad. In four out of four years the forecasts start out 50% to 100% too high. That is impressive!
Here is my favorite chart from that other dismal science, climate science. Although this is not a fair comparison the climate scientists are wrong only 95% of the time! They win!