Economic Crisis of Confidence
BY: NCViking
If Americans are confident in the economy and secure in their jobs and earning potential, they will spend and invest more. This has an enormous impact on the economy creating upward momentum. Alternately, if Americans are worried about losing their jobs and see doom for investments, or get pinched by exploding costs, then the economy is going to suffer. Cheap energy, low costs of doing business and optimism have been the cornerstones of American booms of the past, but all of these items seem to be under assault by the ineptitude of government.
Encouragement of ethanol, obstructions to oil drilling, burdens to refining, the war on coal, and no consensus on a viable plan for meeting future energy needs … all of these things conspired to help sucker-punch the mid 2000’s economic boom. And we still have no viable future energy policy. The only thing keeping oil and energy from spiraling out of control again is depressed demand from the economic downturn. When demand begins to rise again, prices will soar. As a solution, a convoluted Cap and Trade program is being pushed by Democrats that many experts believe will burden business and consumers even further with costs, kicking industry while it is down. The EPA has even gotten in a few foot swings by threatening to impose draconian regulations on industry unless the bill gets passed. No matter what, the business community is facing skyrocketing costs to doing business. And there is more …
Almost a year and a half after a subsequent bust in housing prices and the linked financial market crisis, there is still no clarity on what will be done to regulate banks and other financial institutions. Unbelievable! This uncertainty suppresses investment and encourages hoarding of capital, thus exasperating any recovery. Increased regulations are also sure to add costs to doing business. Also, the looming expiration of Bush tax cuts signals in essence, a tax increase.
Cool! Taxes will be going up on those evil “Rich People”, right?
Great. So, what’s the best use of a rich person’s money? 1. Allowing this person to spend more of it, thus creating jobs? 2. Allowing this person to invest more of it, thus creating jobs? Or 3. Sending it into the government black hole? Gee, I wonder.
Oh, and we can’t forget about new, big GovCo. programs like Health Care Reform. Turning upside-down 1/6 of our economy in a behemoth government monstrosity bill … yeah, no uncertainty in that! Government corruption and spending is also completely out of control with historically-expensive yet ineffective stimulus piling on and exasperating the situation. So what level of confidence do Americans have in their elected officials to resolve this situation, or better yet – get out of the way?
Below is a chart of the Consumer Confidence Index since 2005 with a little historical reference laid over the top.
Data Source: The Conference Board Consumer Confidence Index
Consumer confidence and spending “makes the economy go ‘round”, and confidence right now is at historic lows. As reference (scale: 1985 = 100), the Consumer Confidence Index was in the 140’s pre 9/11, peaking in the 110’s in the Bush tax-cut boom, and hit a pathetic 20’s last February and March post-Stimulus. The index rebounded slightly in April 2009 and is now stagnating in the 50’s for the last 10 months, almost 1/3 of what it was pre 9/11. There is a striking correlation to this index and the health of the economy.
What we have here Mr. President, is a Crisis of Confidence. After the election of Barack Obama, there was no surge in confidence. Pass Stimulus, no surge in confidence. Health Care Reform? Cap and Trade Agenda? Not confident. Anything? Stagnation. Worse yet, the Present Situation Index, which measures consumers confidence toward the present economic situation, is at an all-time historic low right now: 20-25. It has changed little since the Stimulus was passed. By way of comparison, it was in the 90’s after 9/11 and in the 180’s in 1999.
Data Source: Conference Board Present Situation Index
Americans are not feeling very confident these days. Well at least the media is reporting small blips up from the cellar as encouraging. Better to be encouraged than discouraged, right?
Unemployment rates have also followed these trends in confidence almost exactly, proving that the Stimulus may have even exasperated the situation by holding down consumer confidence by its fiscal recklessness. As a result, unemployment is over 10%, even higher than if we had done nothing based upon the Obama Administration’s own predictions.
Below is the unemployment rate charted over the same period as the confidence charts, including the same historical reference laid over the top. Looks eerily similar (only flipped), doesn’t it?
Data Source: Bureau of Labor and Statistics
Oh, and to all of those “Obama got the prediction wrong … we would be in a DEPRESSION without Stimulus” peddlers out there, the recession was well within historic norms a year ago.
Below is a chart with the employment rate increase (% change) for 2009 with a few industries thrown in for comparison. Now, wasn’t that Stimulus supposed to save oodles of jobs in maintenance and construction with all of that shovel-ready work? Uh … maybe not. As you can see, the unemployment rate increase in both of those industries far outpaced the total unemployment rate increase, while management and business lost jobs at a slower rate. Go figure.
Data Source: Bureau of Labor Statistics
There really are a lot of reasons to be optimistic. Interest rates are at historic lows, inflation remains low, the cost of doing business is still low (at the moment) and energy prices are lower than a few years ago. There is also an unprecedented $1.1 trillion in excess reserves being hoarded by financial institutions. Money that could be invested. So what gives? Waning confidence in President Obama, Democrats and their agenda is what. Most reasonable people who were immune to the effects of the Obama hypnosis understood that we were getting one green POTUS. He would be learning on the job, and sure enough – that’s what he is doing. Unless Obama learns quickly, provides some level of certainty, moves to the center and focuses his efforts on TRULY getting people back to work, its going to be a long couple of years for Democrats and America.
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This may not have escaped you, but when did all these issues and loss of confidence begin?
It could have to do something with a change of leadership. I will not blame Obama for this starting… but 6 months after the election of the Dems in Congress, and the changes implemented (or threatened changes) caused uncertainty in the market.
Is it any wonder why things tanked? Hmmm….
Could be, but a barrel of crude oil tripled over the time period highlighted. I have spent most of my career in manufacturing and the impact of this spike sent shockwaves through everything, from dramatic increases in raw materials to skyrocketing transportation costs. Companies did one of two things – passed the costs on thus raising prices, or more often then not absorbed the impact and reduced spending capital and/or profits. Placing this event over the charts is a remarkable cause and effect, yet nobody talks about it.
Here is the oil price run-up superimposed over one of the indexes, then flipped for reference (blue line being gas prices, red being a barrel of crude). Here you can see that confidence spiraling downward was due to the huge spike in oil shocking the economy. It correlates perfectly. Then, when prices stabilized to pre-spike levels, something continues to hold confidence down, even though the cost of doing business reduced and was stabilized.
Way back in early 2009 you gents and I had a debate over whether this is the worst economic disaster since The Great Depression. You said it was normal and that we would be out of it within 16 to 22 months. It did not seem to matter to you that the financial systems froze, that lending was down and that we were then (and continue to be) in the de-leveraging of the greatest real estate bubble crisis, probably the greatest ever in American history.
The recession began in Dec 2007, the financial collapse in September 2008. It has now been 26 months of the recession, and it will continue for probably another 18 – 24 months. In my estimation, we are headed for a 42 – 48 month recession.
There are many factors for the lack of consumer confidence. You guys want to pin it on Obama and democrats, and would like to ignore the role Republicans had in bringing on the crisis. For partisans, life is easy: everything is some one else’s fault, always. I’ll prove my point shortly.
There are plenty of reasons for low consumer confidence. Those reasons affect very likely affect you personally:
- for most Americans, even if they did the right thing, have home values that are going down, and will continue to go down. In most markets home prices are at the 1998 level or even earlier.
- for most Americans, home sales in their area, except for short bursts of activity, are on their way down.
- for most Americans, their mortgages are likely to be underwater, or will soon be.
- most Americans will never be able to sell their home, at least not for the next 5 years or so, without taking a loss.
Replace your name where you see most Americans, because unless you happen to rent, this is likely to affect you.
You cannot blame Obama for the decline of home values. It is pure and simple supply and demand economics.
It is that reality, more than anything else, the drives consumer confidence today.
It also doesn’t help that unemployment is high. Let’s discuss some of Obama’s initiatives and where it has led us:
- it is estimated (various articles in Bloomberg and others) that saving GM saved approx 2.5 million jobs. That is something like 3% unemployment. That would be 12.2 instead of 9.7, or if you want the underemployment stat often quoted on wingnut radio: 20% instead of 17.5.
- real estate sales are held up artificially through a series of mortgage initiatives (about $1.4T) and through first time home buyer programs. Without those,it is estimated that in most markets sales would drop by 50%. You can probably predict where home prices would be headed as supply outpaces demand.
I think the Administration should have more clearly articulated the severity of the current recession. Instead of suggesting 8% unemployment they should have stated 12% unemployment. It would make the current unemployment look good.
But creating fear, and using a sky is falling tactic are not tools that the current administration uses readily, much to their own undoing.
Now to prove how to partisans, such as yourselves, everything is always someone else’s fault, no matter what:
- recession created under Bush’s term: Obama fault cause he couldn’t fix it fast enough.
- Republicans in congress for 12 years, the President in the WH for 8 years, yet none of them could pass health care reform. You would say it is trial lawyers fault. The President and congress are apparently powerless and faultless.
- Housing bubble under Republican leadership: somehow it is the democrats fault.
To look at elections recently, message manipulation is working for Republicans. I would say they do it through fear: debt, spending, and other tactics. It is never their fault, always someone else’s.
Even the current recession – someone else’s problem. I tend to ignore all of this “data” that shows consumer confidence is flat and therefore somehow Obama’s fault.
My prediction: it may get worse; we are hardly over the housing crisis; if you do let economic forces lose what you will find is a steep drop in housing prices. It will drag everyone’s houses down, including your own.
Just remember who allowed the housing bubble to begin with.
YES this recession was in line with others, and I backed that up in my post. All recessions have their nasty sides. In the early 1980s, interest rates AND inflation were over 20%, unemployment well over 10% and the money supply was retracted … good grief! In 2000-01, the stock market bubble burst, followed by the worst attack on America – ever! Thousands of innocent civilians killed in horrific fashion by surprise, right here at home, right in the heart of the world’s financial center for God’s sake. TALK ABOUT UNCERTAINTY! Bush has his flaws, but he stepped up in the worst American crisis in our modern history and held the country together. He was a leader when we needed it. Doing the wrong things at that moment could have easily been disastrous.
This recession saw a fast run-up on energy prices, a stunning run on money markets causing a bank crises (averted by TARP [a very good decision, though not accountable enough]) and a real estate bubble burst. We argued over how government should respond to the recession. I said slow-to-realize, corruption-laced federal spending of that magnitude was the wrong thing to do. I, and many high-profile economists said it was wrong. We needed something that would have given the economy an immediate confidence boost and kick. The Recovery Act boondoggle and other Obama policies were not it. Everyone with half a mind KNEW that any real affect the Recovery Act would have (you can’t spend 800 billion dollars without having some) will not be realized until 2011 at the earliest. And lo and behold, that is exactly what is happening. Immediate stimulus would have been targeted tax cuts (meaning targeted for ’stimulus’) which includes capital gains cuts, payroll tax cuts, increased write offs, accounting rules changes, special hastened depreciation of assets or equipment purchased in 2009, capital gains tax holidays for buyers of foreclosed homes, etc. Putting more money into the hands of the job creators. I even suggested federal government bridge loans to states and maybe some temporary safety net measures to help soften the blow. This would have created a positive business environment, stimulated activity and tempered fears and uncertainty. This is not what we got. Obama bought the solution last year and it failed to stop the carnage. And confidence and certainty are still at all time lows – meaning, the future still looks very grim to everyone.
Amazingly, the economic pieces are there for growth … extremely low interest rates, low energy costs, low costs to doing business (for now), real estate bargains abound, taxes are moderate, technology is advanced, efficiency up, banks are flush with capital … so what gives? It’s all about confidence and certainty. Investors, financiers, manufacturers, consumers … all of them are collectively holding their breath and government has not only done a lousy job of building confidence and certainty, but has actually aggravated it. Confidence comes from the top. In the face of economic or American crisis, Reagan instilled confidence. Carter and Bush Sr. did not. Clinton and W instilled confidence. Obama does not. The numbers don’t lie. Confidence and certainty is at the heart of economic activity. And to say that it is all about housing is short sighted. Here are a few others:
Government has taken fiscal recklessness, with the pass of the stimulus and release of the latest budget, to new absurd levels. Unsustainable levels, thus creating massive uneasiness and dollar stress … even public revolts!
Obama and democrats are pushing hard-to-understand monstrosity legislation to reshape pillars of our economy, including energy and health care, making everyone nervous and uncertain at the wrong time.
Corruption and giveaways in government are at an all-time high making the prospect of any meaningful responsible actions and/or effectiveness mute.
The Bush tax breaks are being allowed to expire thus a tax increase is on the horizon.
Obama has a terribly scatter-brained, law-enforcement and politically correct — yes, no, maybe — approach to the biggest threat to our national security. His failure in leadership in this regard is making everyone quite nervous.
Banks and investment institutions have no idea what the government is going to finally levy against them in regulations. They also sense a lack of effective leadership and are also not confident, so they hoard money.
Businesses cannot get capital to expand and manufacturing has no idea what the government is going to do to punish them with green taxes. Businesses are also holding their collective breath regarding health care.
Consumers lack confidence in the government and the prospects for their future, they lack certainty, so they have stopped spending.
Steps for investment in small business are ones in the right direction. Tabling the big GovCo. initiatives would be another. A round of stimulative actions similar to what I had suggested would go along way. A real short and long-term energy solution that is pro-business, pro cheap energy that gradually and logically moves us away from finite energy resources would be another – and end the war on CO2. [Technology and advancements will naturally move us away from burning stuff for energy, which is terribly inefficient.] Compromising and finishing the long over due financial regulation bill could help financial institutions know what they are facing and adapt, instead of uncertainty — a year and half has gone by on this critical issue, it’s no wonder lending is still anemic! And a REAL effort to reign in government waste and out of control spending would instill a great bit of confidence. The freeze is a start, but it is more political posturing than real reform. Time to roll up our sleeves.
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