Economy Rolling Over, Obama Scandals Multiply
FORECASTS & TRENDS E-LETTER
IN THIS ISSUE:
1. May Unemployment Report – Lackluster At Best
2. Nearly Four Million Job Openings Go Unfilled
3. Is the Economy Rolling Over to the Downside?
4. IRS Political Timeline Points to President Obama
There’s a lot to cover today, starting with last Friday’s unemployment report that was hailed by the media and the stock markets. But after looking into the data, I will argue that the report was lackluster at best. From there we’ll look at why the big picture economic outlook is becoming worrisome. We’ll drill down into the data only to conclude that the economy may be rolling over to the downside.
And we’ll end with some thoughts on the Obama administration’s defense of the growing scandals. The Obama defense, as usual, is that this is nothing different from what George W. Bush did when he was in office. That story is wearing very thin, especially now that we’re five years into Obama’s presidency. The truth is, this is much worse! Plus, we’ll look at some new revelations that further suggest it was President Obama himself who caused the IRS to target conservative groups.
May Unemployment Report – Lackluster At Best
It’s sad how many Americans and the media have come to expect so little from our economy. Last Friday’s unemployment report is evidence of that. The headline unemployment rate rose in May from 7.5% to 7.6%. The Bureau of Labor Statistics (BLS) reported that the economy produced 175,000 new jobs last month, in line with the three-year monthly average.
The media spun the report as positive because more people started looking for work, and this caused the headline number to rise 0.1%. Admittedly, more people looking for work is a good thing. But that misses the point that it takes around 250,000 new jobs a month just to keep up with population growth.
The total number of unemployed remained unchanged at 11.8 million in May. Of those, 4.4 million (37.3%) have been unemployed for 27 weeks or longer. The civilian labor force rose by 420,000 to 155.7 million in May, but the labor force participation rate was little changed at a very low 63.4%.
In May, the number of persons employed part-time for economic reasons (sometimes referred to as involuntary part-time workers) was unchanged at 7.9 million. These individuals were working part-time because their hours had been cut back or because they were unable to find full-time jobs.
The manufacturing sector lost 8,000 jobs in May, the third straight month of declines. The National Association of Manufacturers (NAM) said that’s partly because of weak exports. The NAM also says government sequester budget cuts have also hurt, especially for manufacturers that are in the Defense Department’s supply chain.
So while the media played up the report and the stock markets rallied strongly on Friday, after we look deeper into the data, we find that the report was lackluster at best.
Nearly Four Million Job Openings Go Unfilled
Along with the headline unemployment report, the BLS also publishes a monthly report on the number of job openings that are available. To the surprise of many people, the BLS reported on May 7 that there were 3.8 million job openings in the US at the end of March, down only slightly from 3.9 million in February. How can this be, you might ask.
When it comes to this mismatch between unemployment numbers and unfilled jobs, blame is cast in all directions. Many job seekers are unwilling to relocate to other cities where jobs are more plentiful, or are reluctant to work in unfamiliar positions.
Many employers, meanwhile, are holding out for the elusive “perfect candidate,” and complain that schools just aren’t providing enough graduates with the right skills. Others remain reluctant to actually hire due to uncertainties about the economy, regulations, healthcare, etc. This can string job applicants along for weeks or months before they make a decision, if at all.
The number of job openings has increased to levels not seen since the height of the financial crisis, but these jobs are staying unfilled much longer than they used to – an average of 23 business days today compared to a low of 15 in mid-2009, according to the BLS.
As noted above, some attribute the more extended process to a mismatch between the requirements of the nearly four million jobs available and the skills held by many of the nearly 12 million unemployed. That’s probably true in some high-skilled fields, like nursing or biotech, but for a large majority of positions where candidates are plentiful, the bigger problem seems to be a sort of hiring paralysis.
As a result, employers are bringing in large numbers of candidates for interview after interview after interview. Data from Glassdoor.com, a site that collects information on hiring at different companies, shows that the average duration of the interview process at major companies like Starbucks, General Mills and Southwest Airlines has roughly doubled since 2010.
Human resource consultants and headhunters say there is a great fear of making a mistake and wasting money in a tight economy. There’s also fear among many business owners and personnel managers around the country that the economy is going to go back into a recession before long. Which brings us nicely to our next topic…
Is the Economy Rolling Over to the Downside?
While the stock markets continue to rally, due in large part to the Fed’s continued QE bond and mortgage buying, there are some troubling signs in the economic data. If we drill down a little deeper, we find that various important sectors of the economy have either been slowing down or failing to meet expectations, a condition that has shown no signs of reversing.
For example, real GDP has increased only 1.8% over the last four quarters, and within a range that has been in force since the 1Q of 2010. The current quarter is shaping up as only marginally better with the last estimate of 2.4%. Many economists are now lowering their GDP estimates for the second half of this year.
Manufacturing production has declined for the last two months and in three of the last four. Even vehicle sales, which recovered strongly from the recession bottom, have now flattened out for the last six months. The Chicago Fed national activity index, which covers a broad swath of the economy, showed deterioration in growth in April, and has been negative in three of the last four months.
Returning to the jobs front, we find that the four-week moving average of new weekly unemployment claims has moved from 338,000 to 353,000 over the past month. The ADP employment report for May came in far below expectations, and has averaged 124,000 new jobs over the last two months, compared to 203,000 over the prior five. The majority of Fed regional surveys found weaker hiring in May than in April. The National Federation of Independent Businesses (NFIB) recently reported reduced hiring in May.
The ISM manufacturing index of 49 for May was the lowest since June 2009, when the recovery was only getting underway. That number was even worse than it looked since new orders plunged 3.5 points while inventories rose. The ISM non-manufacturing index for May was down from a year earlier, and has not recorded a monthly increase since December. Moreover, its employment index component dropped from 52 to 50.1, its fourth consecutive decline.
Consumer expenditures for April declined 0.2% and disposable income fell 0.1%. Compared to a year-earlier, real consumer spending is up only 2.1% and real disposable income only 1%. Consumers were able to maintain this lackluster rate of spending only by reducing their savings rate to 2.5%. Notably, the savings rate was under 3% in each of the first four months of the year, whereas prior to this year the rate had not been under 3% for any month since December 2007, the peak of the economic cycle.
Although there is a lot of talk about a stronger economic recovery, the facts, as outlined above, indicate otherwise. Furthermore, the effects of the sequester, which started very slowly, are starting to become more evident in slowing wage growth and reduced hours. The original estimates of a 1.5% drag in GDP growth from the tax increase and sequester still appear to be valid and will likely be felt the most in the 2Q and 3Q.
A growing number of analysts believe that the overly optimistic earnings forecasts for the rest of the year will prove to be highly disappointing in reality. Although 1Q earnings slightly beat the consensus, revenues were flat, and corporations will find it exceedingly difficult to increase earnings with no help from revenues, which are likely to remain under pressure.
In addition, global growth is slowing with much of Europe in recession, China coming in short of expectations and emerging markets weakening. As I have warned for the last several years, with the huge build up in federal debt and consumer debt, it would be difficult to generate a normal recovery in either the US or the rest of the world. Even with the Fed adding $2.5 trillion of bonds and mortgages to its balance sheet since 2008, we still have prolonged sluggish growth with no end in sight.
So, is the US economy rolling over to the downside? It certainly looks that way. Does that mean we are headed for a new recession? That remains to be seen. The third and final estimate of 1Q GDP will be out on Wednesday, June 26. We’ll revisit the question of a new recession following that report.
Oh, and one last thing: The government once again hit the debt ceiling on May 17, and the Treasury is now using “extraordinary measures” to allow the government to continue paying its bills. What, you didn’t hear about this? That’s because the media was largely silent. That’s why I wrote about it in detail in my BLOG last Thursday.
IRS Political Timeline Points to President Obama
As I mentioned in last week’s E-Letter, Wall Street Journal writer Kimberley Strassel has suggested that President Obama himself telegraphed the marching orders for the IRS to target conservative nonprofit groups in a series of speeches, in social media, in TV ads and elsewhere.
Starting in 2010, Obama repeatedly warned about the “threat” to democracy posed by conservative groups, just before the IRS began targeting these organizations. Last Friday, Ms. Strassel published a detailed timeline of the president’s public remarks on this matter starting in 2010. You can read that column for yourself below.
An IRS Political Timeline
by Kimberley Strassel
Perhaps the only useful part of the inspector general's audit of the IRS was its timeline. We know that it was August 2010 when the IRS issued its first “Be On the Lookout” [BOLO] list, flagging applications containing key conservative words and issues. The criteria would expand in the months to come.
What else was happening in the summer and fall of 2010? The Obama administration and its allies continue to suggest the IRS was working in some political vacuum. What they'd rather everyone forget is that the IRS's first BOLO list coincided with their own attack against "shadowy" or "front" conservative groups that they claimed were rigging the electoral system.
Below is a more relevant timeline, a political one, which seeks to remind readers of the context in which the IRS targeting happened.
Aug. 9, 2010: In Texas, President Obama for the first time publicly names a group he is obsessed with—Americans for Prosperity (founded by the [multi-billionaire] Koch Brothers)—and warns about conservative groups. Taking up a cry that had until then largely been confined to left-wing media and activists, he says: "Right now all around this country there are groups with harmless-sounding names like Americans for Prosperity, who are running millions of dollars of ads . . . And they don't have to say who exactly the Americans for Prosperity are. You don't know if it's a foreign-controlled corporation."
Aug. 11: The Democratic Congressional Campaign Committee sends out a fundraising email warning about "Karl Rove-inspired shadow groups."
Aug. 21: Mr. Obama devotes his weekly radio address to the threat of "attack ads run by shadowy groups with harmless-sounding names. We don't know who's behind these ads and we don't know who's paying for them. . . . You don't know if it's a foreign-controlled corporation. . . . The only people who don't want to disclose the truth are people with something to hide."
Week of Aug. 23: The New Yorker's Jane Mayer authors a hit piece on the Koch brothers, entitled "Covert Operations," in which she accuses them of funding "political front groups." The piece repeats the White House theme, with Ms. Mayer claiming the Kochs have created "slippery organizations with generic-sounding names" that have "made it difficult to ascertain the extent of their influence in Washington."
Aug. 27: White House economist Austan Goolsbee, in a background briefing with reporters, accuses Koch Industries of being a pass-through entity that does "not pay corporate income tax." The Treasury inspector general investigates how it is that Mr. Goolsbee might have confidential tax information. The report has never been released.
This same week, the Democratic Party files a complaint with the IRS claiming the Americans for Prosperity Foundation is violating its tax-exempt status.
Sept. 2: The Democratic Congressional Campaign Committee warns on its website that the Kochs have "funneled their money into right-wing shadow groups."
Sept. 16: Mr. Obama, in Connecticut, repeats that a "foreign-controlled entity" might be funding "millions of dollars of attack ads." Four days later, in Philadelphia, he again says the problem is that "nobody knows" who is behind conservative groups.
Sept. 21: Sam Stein, in his Huffington Post article "Obama, Dems Try to Make Shadowy Conservative Groups a Problem for Conservatives," writes that a "senior administration official" had "urged a small gathering of reporters to start writing on what he deemed 'the most insidious power grab that we have seen in a very long time.' "
Sept. 22: In New York City, Mr. Obama warns that conservative groups "pose as non-for-profit, social welfare and trade groups," even though they are "guided by seasoned Republican political operatives" who might be funded by a "foreign-controlled corporation."
Sept. 26: On ABC's "This Week," Obama senior adviser David Axelrod declares outright that the "benign-sounding Americans for Prosperity, the American Crossroads Fund" are "front groups for foreign-controlled companies."
Sept. 28: The president, in Wisconsin, again warns about conservative organizations "posing as nonprofit groups." Sen. Max Baucus, chairman of the Senate Finance Committee, writes to the IRS demanding it investigate nonprofits. The letter names conservative organizations.
On Oct. 14, Mr. Obama calls these groups "a problem for democracy." On Oct. 22, he slams those who "hide behind these front groups." On Oct. 25, he upgrades them to a "threat to our democracy." On Oct. 26, he decries groups engaged in "unsupervised spending."
These were not off-the-cuff remarks. They were repeated by the White House and echoed by its allies in campaign events, emails, social media and TV ads. The president of the United States spent months warning the country that "shadowy," conservative "front" groups—"posing" as tax-exempt entities and illegally controlled by "foreign" players—were engaged in "unsupervised" spending that posed a "threat" to democracy.
Yet we are to believe that a few rogue IRS employees just happened during that time to begin systematically targeting conservative groups? A mere coincidence that among the things the IRS demanded of these groups were "copies of any contracts with and training materials provided by Americans for Prosperity"?
This newspaper [WSJ] reported Thursday that Cincinnati IRS employees are now telling investigators that they took their orders from Washington. For anyone with a memory of 2010 politics, that was obvious from the start. END QUOTE
The timeline above adds a lot of substance to the argument that President Obama himself caused the IRS to target conservative nonprofit groups. This IRS scandal is not about to go away, nor should it. Neither is the latest scandal with the NSA hoovering-up billions of phone records a day from unsuspecting Americans. This NSA scandal may dwarf even the IRS blockbuster!
And there are more scandals coming, we are told. You can read about two of them in the links below. The first two articles detail scandals that have broken just in the last week. And the third article is about a new State Department cover-up regarding allegations of prostitution and drug use by members of Hillary’s security team during overseas trips, which just came to light yesterday.
All the best,
Gary D. Halbert
Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and 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 judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.