CBOs New Forecasts & The Unemployment Report

 

 

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
February 7, 2012

IN THIS ISSUE:

1.  CBO’s Latest Long-term Economic Forecasts

2.  Economic Growth, Deficits, Unemployment Rate, Etc.

3.  Federal Workers Owe $3.4 Billion in Back Taxes

4.  More Encouraging Economic Reports
 

CBO’s Latest Long-term Economic Forecasts

At the end of January of each year, the non-partisan Congressional Budget Office issues a complex set of economic and budget forecasts for the next 10 years. The forecasts I will discuss below were released to the public last Tuesday, January 31.

These long-term forecasts are not particularly reliable because Congress and the President enact new laws periodically which can significantly change federal spending, tax policies, etc., etc.  As such, we will focus today mainly on the CBO’s latest forecasts for FY2012 and FY2013, which serve as a useful guidepost.

Before we get into the numbers, let me warn you that the forecasts for 2012 and 2013 (especially) were disappointing to many, but should not have come as a surprise to my clients and regular readers of this E-Letter. 

When the CBO creates these forecasts for such things as economic growth, federal spending, budget deficits, the unemployment rate, etc., they make two separate forecasts: 1) the “baseline” forecast; and 2) the “alternative” forecast.

The baseline forecast assumes that current laws remain in place over the next 10 years. The alternative forecast reflects expected changes that are likely to occur in the future. For example, the so-called Bush tax cuts are legally set to expire at the end of this year. The CBO baseline forecasts assume this will happen, whereas the alternative forecasts assume the Bush tax cuts will be extended.  Based on the assumptions used, the baseline and alternative forecasts are usually quite different.

Economic Growth, Deficits, Unemployment Rate, Etc.

The CBO’s alternative forecast shows economic growth of 2.0% in GDP for FY2012. Regular readers will know that this number is fairly consistent with what I have discussed in recent weeks based on the various sources I use. No surprise there, at least for us. Yet the mainstream media seemed to be roundly disappointed in this forecast for 2012.

Making matters worse, the CBO’s projection for FY2013 was for growth of only 1.1% in GDP. That number was lower than even I expected for next year. The CBO cites the end of the Bush tax cuts at the end of this year, federal spending cuts due to kick in next year, the end of the payroll tax cut and the implementation of ObamaCare as just some of the reasons for the low growth projection.  

CBO Projections

Several questions jump out of the table above. In the top line (Real GDP), you can see the forecast of 2.0% for 2012 and the 1.1% for 2013. Then the table shows real GDP jumping to an average of 4.1% in 2014-2017 and then back to only 2.5% in 2018-2022. The jump in GDP to 4.1% in 2014-2017 is not consistent with the CBO’s summary analysis. In the text summary, the CBO says the following which seems to contradict the 4.1% forecast above:

CBO expects economic activity to quicken after 2013 but real GDP to remain below the economy’s potential until 2018. [Emphasis mine]

I guess it just depends on what the CBO considers the economy’s “potential” to be.

Another questionable assumption in the table above is the inflation rate over the next decade. You’ll notice that the Consumer Price Index (all items) is projected to fall from 3.3% in 2011 to only 1.4% this year. That remains to be seen. Then the CPI stays under 2% in all years to 2017. Then it rises only to 2.3% in 2018-2022. I don’t know about you, but that looks awfully optimistic to me.

As for the unemployment rate, the CBO had another surprise (again, not for my readers). The CBO expects the unemployment rate to rise again before trending lower in subsequent years. The CBO expects the unemployment rate to remain above 8% for 2012 and 2013. In the summary analysis, the CBO says the unemployment rate will not fall to 7% until 2015. Thus, the decline from 9.2% in 2013 to 5.6% in 2017 once again looks pretty optimistic to me.

Let us not forget, as the CBO points out in its latest report, if the Bureau of Labor statistics counted workers who have given up looking for work, or haven’t looked in the last month, the real unemployment rate would be nearly 10%.

Changing gears, the CBO’s forecast for this year’s federal budget deficit is $1.1 trillion. If accurate, FY2012 will mark the fourth consecutive year of trillion dollar budget deficits under the Obama Administration:

             FY2009            $1.41 Trillion              FY2011            $1.30 Trillion

                        FY2010            $1.29 Trillion              FY2012            $1.10 Trillion (est.)
                                                           

TOTAL $5.10 TRILLION

If the deficit is $1.1 trillion this year, that will increase the national debt, currently $15.3 trillion, to over $16 trillion. The CBO also reports that the national debt held by the public (not including debt held by government agencies) has soared to 72.5% of GDP from just 40.3% in 2008. That’s an enormous increase in just three years!

The CBO also projects that the federal budget will go up every single year but one (2013) through 2022, and it won’t surprise me if Obama’s 2013 budget is not larger as well. Specifically, the CBO projected that the budget will rise from just under $3.6 trillion in 2011 to over $5 trillion in 2022. This is the result of so-called “baseline budgeting.” So much for reigning in government spending!

Finally, let me throw in one other interesting factoid from the latest CBO report. The CBO reported that non-college educated federal workers are paid 36% more in total compensation than similar private-sector employees. Those with a bachelor’s degree average 15% higher than their private sector counterparts. I wrote in more detail on this wage disparity in my August 17, 2010 E-Letter.

To read the CBO’s latest long-term forecasts, go to: http://www.cbo.gov/ftpdocs/126xx/doc12699/01-31-2012_Outlook.pdf

Federal Workers Owe $3.4 Billion in Back Taxes

Since we’re on the subject of federal workers and how well they are paid, I bring you the following news, especially since the only major media outlet to air this story was FOX News. A new report from the IRS revealed that thousands of federal employees owe the country more than $3.4 billion in back taxes. That number is up 3% from a year ago.

Certain employees in the Dept. of Homeland Security owe $37 million in back taxes.  At the Treasury Dept. (where Secretary Tim Geithner had to pay $42,000 in back taxes), certain employees there owe $9.3 million in back taxes according to the IRS. In the House of Representatives, the number is $8.5 million in arrears. At the Dept. of Education, the number is $4.3 million. These are just a few examples.

But this latest IRS report must be most embarrassing for none other than President Obama. His big theme of late is that everyone should “pay their fair share” of income taxes. According to the IRS, some members of his own Executive Office staff are not only not paying their fair share, but are not even paying what the IRS says they owe.

The IRS report reveals that 36 of President Obama’s office staff owe the country a total of $833,970 in back taxes! Other published reports show that Obama’s White House staff consists of 457 aides. Many of them are highly paid. Nearly a third make more than $100,000 with 21 being paid the top White House staff salary of $172,000 plus benefits.

What, you haven’t heard about this? You’d think this would be all over the news. Yet as best I can tell, FOX is the only major media outlet that has touched this story. Imagine all the media flurry there would be if this were happening under a Republican president!

So the next time you hear President Obama call for the wealthy to pay their fair share (ie – higher income tax rates), you’ll know that he really should call on his own staff members and other federal workers who owe the government $3.4 billion in delinquent income taxes. Thanks to the IRS for making this information public.

Unemployment Report Better Than Expected, Or Was It?

Last Friday’s unemployment report came in better than expected, at least in the eyes of the media. But there was something you probably didn’t hear about from the report. I’ll get to that after the headline numbers.

In January, the unemployment rate fell to 8.3%, the fifth consecutive monthly drop. The number of new jobs grew more than expected at 243,000. The number of unemployed fell to 12.8 million in January, down from 13.1 million in December. The graphic below illustrates the highlights of the report.

U.S. employment picture

A look at the unemployment rate, change in the number of jobs, and unemployment by sector.

Unemployment

Source: Bureau of Labor Statistics, The Washington Post.

What the mainstream media failed to point out was the fact that the Bureau of Labor Statistics (BLS) adjusted the size of the civilian work force downward by a record 1.2 million people.  Initially, many analysts (including yours truly) questioned how the workforce could drop so much in one month. However, upon further review, we see that the downward adjustment came as a result of the 2010 Census which found that there were fewer workers in the workforce over the 10 years ended 2010 than previously estimated.

Labor Force

Source: Bloomberg, ZeroHedge

What you also didn’t hear from the mainstream media is the fact that the Labor Force Participation Rate (those employed and those unemployed but actively looking for work) fell to the lowest level in 30 years last month to 63.7% (see chart below).

At the end of the recession (June, 2009), the labor force participation rate was 65.7%. In January 2012, it was 63.7%. The difference between these two numbers represents 4.8 million people who have given up on looking for work – since the recession ended.

If the Labor Force Participation Rate for January 2012 had remained the same as it was in December 2011, the unemployment rate would have risen by 0.2 percentage points to 8.7%, rather than falling by 0.2 percentage points to 8.3%.

Part of the decline in the participation rate was due to changed age demographics in the 2010 Census, but it was a significant decline nonetheless. Yet the media claimed this was the best unemployment report in over two years. Not!

Participation Rate

Source: Bloomberg, ZeroHedge

Unfortunately, the number of long-term unemployed – those who have been out of work for 27 weeks or more – was little changed at 5.5 million, almost 43% of all unemployed. The number of people employed part-time because their hours had been cut back or because they couldn’t find full-time work rose slightly from 8.1 million to 8.2 million.

Moreover, the number of people the Labor Department classifies as “marginally attached” to the economy held steady at about 2.8 million. The government classifies those people who want to work and have looked for a job sometime in the past 12 months as marginally attached. They are not counted as unemployed because they have not looked for work in the past month.

The good news is that businesses overall are reducing layoffs and in some cases are actually hiring new employees across several industries. The bad news is that the workforce is 1.2 million people less than the BLS thought it was just one month ago. That new fact is largely the reason the unemployment rate fell to 8.3%.

More Economic Reports

The Labor Dept. reported last Thursday that initial claims for new unemployment benefits rose by only 367,000 in the week ended January 28. This was lower than expected. The four-week moving average for initial claims fell to 375,750. The trend is moving in the right direction.

Other recent reports were mixed. The Consumer Confidence Index actually fell in January to 61.1, down from 64.8 in December. This came as a surprise since the pre-report consensus was 67.0.  The ISM manufacturing index and the ISM services index both improved in January. Personal income rose a solid 0.5% in December.

Leading indicators rose less than expected at 0.4% in December. Durable goods orders rose 3.0% in December, which was better than the pre-report consensus but down from 4.3% in November. Construction spending rose a better than expected 1.5% in December, while factory orders rose less than expected at 1.1%.   

Overall, the latest reports continue to confirm that the economy is expanding but at a slow pace as evidenced by the advance estimate of 4Q GDP which came in at only 2.8%. We’ll get our next estimate of 4Q GDP on February 29.

 

Wishing you all the best,

Gary D. Halbert

 

Special Articles

Obama’s Deficits - $5 Trillion and Change
http://online.wsj.com/article/SB10001424052970204740904577195352148844134.html?mod=WSJ_Opinion_LEADTop

Federal employees owe $3.4 billion in back taxes
http://news.investors.com/Article/599002/201201260818/obama-white-house-staff-back-taxes.htm

Another Unemployment Rate Fairy Tale
http://www.realclearmarkets.com/articles/2012/02/06/another_unemployment_rate_fairy_tale_99502.html

 

 

 

 

 


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, Mike Posey (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.

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