Post-Election Bounce

January 1, 2017

Happy New Year!  How many days will it take before we remember to write the year correctly as 2017, not 2016? It is going to be an interesting year, I bet.  But let’s do a year end review.

Homeownership

The home ownership rate has fallen near the lows set in 1985 and the mid-1960s at about less than 64%. (Graph)  In 2004, the rate hit a high of 69%.  For the U.S., the sweet spot is probably around 2/3 or 66%.  Most other countries have higher rates of home ownership, including Cuba with a rate of 90%. (Wikipedia article)  Rents in some cities have been growing rapidly.  In the country as a whole, rents have increased almost 4%, about twice the growth in the CPI, the general rate of inflation for all goods and services. (Graph)

Earnings

Real, or inflation-adjusted, weekly earnings of full time workers spiked up during the recession as employers laid off lower paid and less productive workers.  By late 2013, weekly earnings had fallen to 2006 levels and have risen since, finally surpassing that 2009 peak this year.

Core Work Force

Almost every month I look at the changes in the core work force of those aged 25-54 who are in their prime working years, who buy homes for the first time and have families.  These are the formative years when people build their careers, and form product preferences, making them a prime target for advertisers.  The economy depends on this age group.  They fund the benefit systems of Social Security and Medicare by paying taxes without collecting a benefit.  In short, an economy dependent on intergenerational transfers of money needs this core work force to be employed.

For two decades, from 1988 to 2008, the labor participation rate of this age group remained steady at 82% – 83%. (BLS graph) By the summer of 2015, it had fallen to 80%.  A few percent might not seem like much but each percent is about a million workers.  For the past year it has climbed up from that trough, regaining about half of what was lost since the Great Recession.

Consumer Confidence

A post-election bounce in consumer confidence has put it near the levels of 2001, near the end of the dot-com boom and just before 9-11. (Conference Board)  In 2012, the confidence index was almost half what it is today.

Business Sentiment

Small business sentiment has improved significantly since the November election (NFIB Survey).  Almost a quarter of businesses surveyed expect to add more employees, a jump of 2-1/2 times the 9% of businesses who responded positively in the October survey.  In October, 4% of companies expected sales growth in the coming year.  After the election, 20% responded positively.  This jump in sentiment indicates the degree of hope – and expectation – that business owners have built on the election of Donald Trump.

Hope leads to investment and business investment growth has turned negative (Graph). Recession often, but not always, accompanies negative growth. Since 1960, investment growth has turned negative eleven times.  Eight downturns preceded or accompanied recessions.  Let’s hope this renewed hope and some policy changes reverses sentiment.

On the other hand, those expectations may present a challenge to the incoming administration, which has promised some tax reform and regulatory relief. Small business owners will lobby for different reforms than the executives of large businesses.  Regulations of all types hamper small business but large businesses may welcome some regulation which acts as a barrier to entry into a particular market by smaller firms.

Publicly held firms will continue to lobby for repeal or reform of Sarbane Oxley reporting provisions.  For six years, the Obama administration has wanted to roll back these regulations but has been unable to come up with a compromise between the SEC, which regulates publicly traded companies, and Congress.  A Trump administration may finally reform a law that was rushed into place by George Bush and a Republican Congress in response to the Enron scandal.  That scandal grew in part from the Bush administration’s push to deregulate the energy market.

Voters Veer From Side To Side

We have stumbled from an all Republican government in 2002 to an all Democratic government in 2008 and now come full circle again to an all Republican government. Once in power, neither party can resist using economic policy to pick winners and losers.  Every few years the voters throw out the guys in charge and bring the other guys in, hoping that the party that has been out of power will be chastened somewhat.  Within a few months of taking power, each party digs up their old bones and begins to gnaw on them again.  Tax reform, prison reform, justice and fairness for all, climate change, more regulation, less regulation – these bones are well chewed.

Still we keep trying.  The priests and prophets of long ago kingdoms could not govern.  Neither could the kings and queens of empires.  So we have tried government of the people, by the people and for the people and it has been the bloodiest two centuries in human history.  Still we keep hoping.

The Presidential Test

Most presidents are tested in their first year in office.  Kennedy had to grapple with the Soviet threat and Cuba almost as soon as he took office.   Johnson struggled with urban violence, social upheaval and the war in Vietnam.

Nixon confronted a newly resurgent Viet Cong army when he first took office.  His second term began with the Arab oil embargo.  Ford dealt with the aftermath of Watergate and Nixon’s resignation under the threat of impeachment.

Jimmy Carter began his term with the challenges of high inflation and unemployment, and an energy crisis to boot.  Ronald Reagan wrestled with sky-high interest rates and a back to back recession in his early years.  His successor, H.W. Bush, met a Soviet Union near the end of its 70 year history as Gorbachev loosened the reins of Soviet control of eastern European countries and the Berlin Wall collapsed.

After an unsuccessful attempt to reform health care in his first year of office, Clinton suffered in the off year election of 1994.  G. W. Bush had perhaps the worst first year of any modern President – the tragedy of 9-11.  Obama entered office under a full blown global financial crisis.

Despite Putin’s bargaining rhetoric regarding President-elect Donald Trump, every President has to learn the lesson anew – Russia is not our friend.  Trump will have to learn  the same lesson.  China’s territorial claims in the South China sea may prompt an international incident.  N. Korea could launch a missle at S. Korea and start a small war.  Iran, Afghanistan, Iraq and Syria, Israel’s settlements, Palestinian independence – the crises may come from any of these tinderboxes.  We wish the new President well as he hops into the fire.

Recession and the Presidency

On Tuesday, President Obama will give his annual State of the Union address to Congress and the nation.  This past Saturday, South Carolina chose Newt Gingrich, the former Speaker of the House, as the front runner in their Republican primary.  In three grassroots states, Iowa, New Hampshire and South Carolina, primary voters have chosen three different Republican contenders who are vying for the Chief Executive Office.

For the past 150 years, every President except Lyndon Johnson, Jack Kennedy and Bill Clinton has had to contend with recession during their tenure. (NBER Source)  Every Presidential contender promises that they are going to stop the vicious business cycle that inevitably leads to recession.  With the advent of “JIT” – Just In Time Inventory – increasingly adopted by businesses and their suppliers in the mid to late 90s, recessions were pronounced a thing of the past.  No more would there be an excess build of supply by the nation’s businesses, leading to a sagging economy when product demand inevitably fell.  Advances and investments in technology enabled businesses to respond quickly to fluctuations in demand.  As the milennium approached, it was truly the dawning of a new age.

What was dawning was the advent of a secular bear market, a long period of time when the market falls for a few years, struggles up again, then falls, then rises again as fear and hope compete against one another.

A few weeks ago, I noted that in the middle of 2011, we had finally come out of an almost four year  recession.  This was not the official National Bureau of Economic Research end of the recession.  That happened in the middle of 2009.  This mid-2011 recession end was the “How It Feels” variety as real GDP finally gets back and surpasses the level it was at before GDP started its decline.

Below is a graph comparing the official lengths of recession and the “how it feels” recession length and a comparison of the two during each President’s tenure in the past sixty years.  This comparison helps explain the mood of the country when Presidents Ford, Carter and HW Bush lost re-election bids (Ford was actually not up for re-election since he had taken over the Presidency when Nixon resigned in August 1974).  The chart also gives an insight into the success of re-election bids by Eisenhower, Nixon, Reagan, and GW Bush. The economic pain was either less than or about equal to the official figures of economic distress during their presidencies.

As he prepares for his third State of the Union address, the lesson for President Obama is stark.  History unfortunately repeats itself.  It is also a lesson for any Republican Presidential hopeful; the odds are that he will have to contend with a recession during his tenure if he wins election.  On the campaign trail, how many Presidential hopefuls of either party ever broach the subject of what their administration will do during the eventual recession while they are in office?  Better to promise that it won’t happen on their watch.  It will.

Health Care by Richard Nixon

In 1974, President Nixon stated that 25 million people, or 11.6% of a population of 214 million, had no health care insurance.

In response to Ted Kennedy’s proposal of a single payer type of national health insurance, Nixon countered with a “National Health Insurance Partnership Act aimed to preserve the private insurance market while requiring employers to either cover their workers or make payments into a government insurance fund.”
“Senator Kennedy’s attempt to fashion a compromise national health insurance bill that preserved a place for private insurers ended up pleasing no one.”
“In his first address to Congress after succeeding Nixon, President Gerald Ford urged lawmakers to approve a national health insurance bill but President Ford’s short tenure was dominated by inflation and other economic woes.” “Critical” by Tom Daschle, Scott Greenberger, Jeanne Lambrew, p.65, 66

In the “Last Lion” Ted Kennedy says he made a mistake by insisting on a single payer type system. 35 years later, President Obama is proposing something similar to what Nixon proposed in 1974.

In this digest of census data:
In 2007, “The Census says the number of uninsured fell from 47.0 million to 45.7 million.” That’s 15.3% of a population of 300 million. That’s bad.

However, “nearly 18 million of the uninsured lived in households with annual incomes above $50,000 and could likely afford health insurance.” Well, maybe. In a previous blog I noted Kaiser’s survey figures showing an average of $12K annually for a family plan. In 2007, CNN Money reported that the median mortgage payment was $1566 a month, or $19K. Add in property taxes, utilities, food, school and other costs for their kids and a family might have enough left over for health insurance if they didn’t have to pay income taxes.

“Up to 14 million uninsured adults and children qualified for government programs in 2004 but had not enrolled, according to the BlueCross BlueShield Association.” Public service messages during commercial breaks for American Idol might help spread the word on the availability of these programs – maybe.

“About 18 million 18-to-34-year olds are uninsured. Most of them are healthy and know they can pay incidental expenses out of pocket. Using hard-earned dollars to pay for health care they don’t expect to need is a low priority for them.” The boomers will outvote them.