Obama’s Jobs Speech, The Economy & The Fed

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
September 13, 2011

IN THIS ISSUE:

1. Obama’s Jobs Speech – Good, Bad or Ugly?

2. Obama Jobs Plan is a Political Strategy

3. The Latest Economic Reports Bad Overall

4. Blue Chip Economic Indicators for September

5. Fed’s Next Policy Course Is Still Uncertain

6. Introducing my new Gary D. Halbert BLOG

Introduction

Once again this week, there is a lot of news to cover. We begin with my thoughts on President Obama’s latest “jobs” speech in which he asked for yet another almost $450 billion in stimulus which he said is “paid for.” That all depends on Congress passing a litany of new tax increases that Obama announced yesterday. This guy just never learns! Obama’s latest jobs plan is just a part of a carefully crafted political re-election strategy that he can use regardless of whether or not Congress passes his American Jobs Act.

Following that discussion, we will look at the latest economic reports, including the dreadful August unemployment report. Next, we will move on to the latest news from the Fed and what the FOMC may be up to at its upcoming monetary policy meeting on September 20-21.

Most importantly, I will also announce today that I have started a BLOG. At the end of this E-Letter, I will give you more details. Many people have encouraged me to start a blog, but until now I have resisted. I have recently changed my mind, and you can access my new blog at www.garydhalbert.com. I will be covering a lot of different topics and I trust you will like what you see. If so, I hope you will subscribe and join in the discussions and let me know.

Obama’s Jobs Speech – Good, Bad or Ugly?

Actually, the Obama “jobs” speech and the run up to it were all of the above – good, bad and ugly. Perhaps the ugliest part was the Obama administration’s attempt to have the speech on the same night as the Republican debate last Wednesday. Fortunately, House Speaker Boehner stood firm and Obama changed the speech to Thursday night ahead of the NFL season opener.

Obama’s insistence to give the speech before a Joint Session of Congress was just another example of his arrogance. These Joint Sessions are expensive to put on, but I guess that doesn’t matter given that the national debt has already gone up $4 trillion since Obama took office. Nor that he would propose another almost half a trillion in new stimulus spending in his speech.

The speech and the big build-up to it had the feel of a State of the Union address, which was no doubt the Obama administration’s plan. The President’s voice was elevated throughout the speech which gave it the feel of desperation, not to mention his many orders for Congress to “pass it right away.” It was as if no one knows how to fix this sluggish economy but him!

President Obama’s approval ratings have sunk to new lows, with the lowest being his approval on handling the economy. Despite that, he obviously still believes that more stimulus and some targeted, temporary tax cuts can manipulate our $15 trillion economy to grow. With his speech last Thursday night to Congress, the President is giving that strategy one more government try, along with his call yesterday for a litany of tax increases starting in 2013 (more on this below).

We've already had the biggest Keynesian stimulus ever. Still, some now argue that the $800+ billion stimulus in 2009 wasn’t big enough. Yet at the time it was jammed through Congress, we were told that it would create 3.5 million new jobs and unemployment would stay below 8% and be falling by 2011. It is now 9.1%. But we are now told that this nearly $450 billion in new stimulus will make all the difference. Really?

Starting just as soon as Congress passes his “American Jobs Act” (not likely), President Obama plans to spend another $447 billion in new stimulus on his belief that the shovel-ready jobs will really be there this time. Here is a breakdown of where Obama intends to spend our money:

Obama's Jobs Plan

The President asked Congress to expand and extend the payroll tax cut that expires in December for one more year. Along with tax credits for certain businesses that hire new employees, he says this will cut unemployment. Yet how many business owners are going to hire a lot of people just because Obama gives them a temporary payroll tax cut (assuming it passes)? And they don’t have any idea what ObamaCare will cost them. Also, keep in mind that with so many people working part-time, many companies can simply make them full-time without hiring anyone new.

Not only do the payroll tax cuts and the incentives to hire disappear at the end of 2012, Obama once again pledged to raise taxes on corporations, small businesses and families making over $250,000 a year starting in 2013 (more on this below). The combination of disappearing tax cuts and higher income taxes on those making over $250,000 a year, plus higher capital gains and dividends taxes, will be a huge blow to the economy! Yet the President seems to think businesses operate only in the present and will ignore the tax burdens coming at them down the road.

The $447 Billion is Fully “Paid For”

The same logic applies to Obama’s claim that everything in his new proposal is "paid for." It is not, at least not yet anyway. I don’t know how anyone in the audience kept a straight face when the President promised over and over that the new stimulus will be fully paid for. In his speech last Thursday, he called upon the so-called “SuperCommittee” of six Democrats and six Republicans to find an extra $447 billion in spending cuts. You will recall that the SuperCommittee was set up as part of the debt ceiling deal to find $1.5 trillion in spending cuts over the next decade. Obama said he would add his $447 billion jobs stimulus on top of that.

The SuperCommittee has held only a couple of organizational meetings so far, yet they are supposed to come up with almost $2 trillion in federal spending cuts over the next decade, and do it by Thanksgiving! There is NO GUARANTEE they will do so. In fact, I know of no one who believes the SuperCommittee will come up with $1.5 trillion in cuts by Thanksgiving, much less another $447 billion for Obama’s new jobs plan. Yet the President repeatedly assured the American people that his new stimulus is “fully paid for.”

Under increasing media pressure to explain how his new jobs stimulus is paid for, Obama formally announced yesterday that he is pushing for a broad range of tax increases – on top of the expiration of the Bush tax cuts for individuals making over $200,000 a year and families (joint filers) making over $250,000 a year at the end of 2012, a huge tax increase. Other tax increases Obama announced yesterday include:

Raising the tax rates on capital gains and dividends to “ordinary income” tax rates, an increase from 15% to 35%/39.6% for those making over $200,000/$250,000;
Reducing itemized tax deductions for mortgage interest, charitable contributions and other deductions for those making $200,000/$250,000 a year;
Repeal of tax deductions for oil and gas companies, including drilling and development costs, depletion allowance, Section 199 deductions, etc.;
Requiring fund managers to pay ordinary income tax rates (35%/39.6%) on carried profits, as opposed to current capital gains rates (15%); and
Reducing the depreciation schedule for the owners of corporate jets, which will lead to a loss of jobs in the private jet industry.

Bloomberg News says that the American Jobs Act also reduces the amount of interest from municipal bonds that top earner can exclude from their taxable income. That will diminish demand for state and local bonds – another job killing idea. I don’t see anyone talking about this… yet.

President Obama has threatened these tax rates changes often since he took office, but he has never attached these specific tax increases to any of his proposed legislations thus far. But now he has, as of Monday. According to him, these tax increases are officially a part of his new American Jobs Act that he sent to Congress yesterday.

I have always wondered why Obama kept hinting at these onerous tax increases that almost everyone agrees would hinder the feeble economic recovery. The fact that he would formally recommend them now, when the economy is clearly slowing down, can only be a testament to how liberal he is, and a sign of desperation.

Obama Jobs Plan is a Political Strategy

Most political pundits (including many on the left) agree that Obama’s latest stimulus proposal will be the centerpiece of his re-election strategy. With his approval ratings in the dumps, he needed to announce something big, and $447 billion certainly qualifies! It is so big in fact that the Obama administration fully expects the Republicans in Congress to oppose most or all of it.

President Obama did not outline the litany of tax increases in his speech on Thursday. Rather, he decided to unveil them on Monday, after he and his advisers had the weekend to gauge the reaction to the speech, which was not very positive. With the addition of the tax increases noted above, the President and his team now know that the American Jobs Act is doomed to fail. Even some Democrats will oppose it.

Unfortunately, this raises the question of whether President Obama wanted it to fail.

It has been widely discussed in the media that the Republicans would likely oppose the jobs bill. – and this was before Obama added all the tax increases listed above on Monday. Now the Republicans and even some Democrats are almost certain to oppose it.

There was widespread discussion in the media over the weekend that if the jobs bill failed, Obama would campaign against the Republicans as obstructionists starting the day after the bill fails in Congress. There is widespread agreement on this point in the media.

Again, the question is, did President Obama want it to fail? If yes, that is very sad.

The decision to heap on controversial tax increases at the last minute, which have been opposed every time he has suggested them before, has to make one wonder. I certainly do!

Let’s ponder the strategy of running against the Republicans as “obstructionists.” A Wall Street Journal article I read last week pointed out that Mr. Obama has been “the least obstructed President since LBJ in 1965 or FDR in 1933.” I found that statistic very interesting in light of everything Obama has gotten done in less than three years!

Let’s add them up. He passed $830 billion in stimulus, ObamaCare, the GM-Chrysler bailouts, $3 billion for cash for clunkers, $30 billion in small business loans, $30 billion for mortgage modification, the huge and onerous Dodd-Frank financial reform, credit card price controls, Build America Bonds, jobless benefits for a record 99 weeks, and more.

The only Obama priorities that a Democrat-controlled Congress blocked were “cap-and-trade” on carbon emissions and “union card check,” and both of those would have further damaged growth and jobs. Even last December, after Republicans had retaken the House, Mr. Obama won his one-year payroll tax cut, more jobless benefits and most of what he wanted.

The bottom line is that even if the Republicans were to give Mr. Obama everything he wants in his new jobs bill, the impact on growth would be modest at best, and some now argue that the tax increases on upper income earners will be a drag on the economy even though they don’t take effect until January 1, 2013.

There is little doubt that President Obama will complain: I tried my hardest to pass legislation that would have jump-started the economy, but the Republicans blocked it. But that strategy may ring hollow to many voters who want the government to cut spending, reduce regulation and get out of the way.

And it remains to be seen how many voters have decided that what we don’t need is a president who puts his re-election above the best interests of the country.

The Latest Economic Reports – Bad Overall

Subject to the final report on 2Q GDP, the economy rose at an annual rate of only 0.7% in the first half of this year, significantly lower than the consensus forecasts at the beginning of the year. Growth is expected to be less than 2% in the second half. This is despite the fact that the Index of Leading Economic Indicators (LEI) has risen sharply since early 2009.

This anomaly in the LEI is largely explained by the fact that short-term interest rates have remained near zero, and medium-to-long-term rates have fallen rather steadily for the past two years. As a result of this heavy influence by interest rates, the LEI is largely deemed irrelevant. For the record, the LEI for July (latest data available) was up 0.5%.

Consumer confidence remains in the tank. The Reuters/University of Michigan Consumer Sentiment Index plunged to 55.7 in August, down from 63.7 in July and 68.9 in August 2010. On the positive side, personal spending rose by a more than expected 0.8% in July following -0.1% in June. Personal income rose less than expected in July at 0.3%.

On the manufacturing front, the ISM Index fell to 50.6 in August, down from 50.9 in July. Interestingly, the pre-report consensus was for a decline to 48, so the actual report was better than expected even though it declined. Industrial production rose 0.9% in July, while factory orders rose 2.4%, both better than expected. Durable goods orders rose 4% in July, well above the consensus.

The unemployment report for August was dreadful. The economy added zero net new jobs last month, well below expectations, and the official unemployment rate held steady at 9.1%. The report was in part weaker than expected because 45,000 Verizon employees who were on strike were reported as unemployed. They have since gone back to work. That’s the good news. The bad news is that the Labor Department revised July and June numbers down by 58,000 jobs.

The number of people working part-time due to the weak economy rose from 8.4 million in July to 8.8 million in August. Another 2.6 million people were not counted as unemployed because they had not looked for work in the previous four weeks. Add the 8.8 million “under-employed” and the 2.6 million not looking for work, and the unemployment rate jumps to 16.2%. Finally, if those not looking for work go back to looking, the unemployment rate could actually go higher.

In the housing sector, all of the July numbers were below June levels. This includes new and existing home sales, housing starts and building permits.

While there was some good news in the recent reports, most of the news was disappointing, especially the August unemployment report and the recent plunge in consumer confidence.

Blue Chip Economic Indicators (BCEI)

BCEI surveys around 50 leading economists and forecasters each month. The consensus among the group has now declined for seven consecutive months. In the September survey, the consensus is for growth of 1.9% in the 3Q and 2.1% in the 4Q. These forecasts fell 0.3 and 0.4 respectively from the August survey. This is a substantial drop in only one month. The consensus estimate for GDP growth in 2012 fell 0.3 to 2.2%.

If the forecast for the second half growth of 2% in 2011 is correct, and it may prove too optimistic, that would mean annualized GDP growth of only 1.35% for the entire year (growth was only 0.7% in the first half).

The consensus is for inflation (CPI) to slow down in the second half and average 3.1% for all of 2011. Consumer spending is expected to rise by only 2.1% for all of this year. Perhaps most telling in the latest survey, more analysts now believe the US economy could slip back into recession, and a majority believes that the unemployment rate will remain above 9% until at least the middle of next year.

Fed’s Next Policy Course Is Still Uncertain

Prior to Fed Chairman Bernanke’s speech at the Federal Reserve’s annual symposium in Jackson Hole, WY on August 26, there was quite a lot of speculation that he might announce yet another round of quantitative easing, or QE3. Much as I expected, Bernanke didn’t announce anything really big at that time, other than hinting that the Fed might move to extend the maturities on the $2+ trillion in securities it holds.

On Thursday of last week, Bernanke gave yet another speech in Minneapolis where he again made no significant policy announcements. Even during the Q&A that followed his Minneapolis speech, he made no hints as to the Fed’s next potential monetary policy decision. He merely reiterated his Jackson Hole comments that the Fed still has some tools to employ if economic growth remains on a downward trajectory. What that means remains unclear.

Where does that leave us? Well, that leaves us with the next Fed Open Market Committee (FOMC) meeting on September 20-21. Should we expect anything big to come out of that meeting? Perhaps not, but then again you never know. At the least, I would expect the FOMC to clarify its position on extending the maturities of its debt holdings to try to lower long-term interest rates even further.

Bill Gross, the manager of the PIMCO bond fund – the largest bond fund in the world – believes that if the Fed’s goal is to take medium-and long-term rates even further toward 2%, that’s a bad idea. Gross argues that lenders will not be agreeable to making long-term loans at 2-3% when the risks of a global slowdown are high, and I would have to agree.

I have a link to the story on Bill Gross’s latest thoughts in SPECIAL ARTICLES below. It’s quite interesting as usual, so I encourage you to read it.

At the end of the day, the pressure on the Fed to do “something” right now is enormous. Yet the truth is, there is not much more the Fed can do now to stimulate the economy short of printing a lot more money, which is politically unpopular right now. Until we see the policy statement from the FOMC meeting on September 21, we just have to wait and see.

Introducing My New BLOG

As noted in the Introduction, for over a year many people have encouraged me to start a BLOG, but until now I have resisted. I have recently changed my mind, and have made several postings to my new “Between the Lines” blog over the last month, including the latest posting yesterday.

One reason I have changed my mind is that I will be able to bring you my thoughts in a shorter and much more time-sensitive format. Whenever there is news or ideas I think you would want to know about, I can fire off a blog posting.

I’ve been working on starting this service for several weeks now. Go to http://www.garydhalbert.com/ to view my earlier posts that I have written over the past few weeks. You can use the Subscribe links to either receive my posts by email, or for those who read many blogs and like to use a reader, an RSS feed is also available.

I will be covering a lot of different topics and I trust you will like what you see. If so, I hope you will subscribe and join in the discussions and let me know what you think.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Hilarious Take on Obama Stimulus Speech!
http://www.realclearmarkets.com/articles/2011/09/12/obama_the_veg-o-matic_president_act_now__99248.html

Rasmussen: Reviewing Last Week’s Polls
http://www.rasmussenreports.com/public_content/politics/weekly_updates/what_they
_told_us_reviewing_last_week_s_key_polls

Bill Gross – Fed lowering long-term interest rates could be counter-productive
http://www.moneynews.com/StreetTalk/fed-bernanke-gross-lending/2011/09/07/id/410001?s=al&promo_code=