The January Employment Report: Advantage Obama

Morris Segall      Capital Markets, Economic Growth, economic recovery, employment report, job creation, obama, politics, Presidential election, U.S. stock market, unemployment rate

This past Friday saw the release of important data on the U.S. economy in the months of December, 2011 and January, 2012. Included were factory orders and shipments for December and the ISM Non-Manufacturing survey and employment report for January. All three reports showed surprisingly strong numbers and on the heels of the strong ISM Manufacturing survey for January, released on February 1, showed a  U.S. economy accelerating in recovery.

All four reports showed acceleration in growth to pre-recession levels and none more impressive than the January employment report. The total number of private sector jobs created in January were 257,000, the highest number of new jobs since last April.  In addition, the Labor Department in its annual revisions to the prior year’s employment data, found an additional 631,000 jobs had been created than originally reported. The January employment gains were widespread and included for a second consecutive month, gains in construction, manufacturing and white collar professional, managerial and administrative positions. The number of long term unemployed and underemployed workers declined significantly, as did the average duration of unemployment to approximately 40 weeks from approximately 41 weeks in November and December. The unemployment rate dropped to 8.3%, below analysts expectations, and the lowest unemployment rate since February, 2009. To be sure, 8.3% unemployment and long term unemployed comprising over 40% of total joblessness is not at all a healthy labor market.  Even with the new found jobs in 2011, the economy still needs to recover 4-5 million jobs lost in the recession. Nonetheless, the January employment report represents a turning point, in our opinion, in the economic outlook for the U.S. this year and into next. The acceleration and increased breadth of job creation was the critical missing link to a more classical economic recovery than what we have been seeing since the recession ended in 2009. If the economic data of the last five months continues and increases further, estimates of U.S. GDP growth and corporate earnings growth for 2012-13 will be increased. This in turn will prop up the U.S. stock market as more investors abandon risk aversion in favor of more risk. The latter will continue to be heavily influenced by overseas events in Europe, the Middle East and in the emerging industrialized economies of Asia and Latin America and there are significant problems in these regions that can  offset improved economic news in the U.S. and negatively impact world capital markets.

However, the improving economic data, particularly the January employment report and 2011 revisions, will undoubtedly help the President in his re-election efforts. We have said since his election in 2008, (See our website article, “The Election, November, 2008), the Obama presidency would rise or fall based on the economy. This year’s election has been about jobs and the economy and the improvement in both since last Labor Day will help the President’s  approval ratings. This improvement must continue into this fall’s election to aid the President but the January employment report is what the Democrats and the President have been hoping for going into the election. We will see if it continues.

Morris R. Segall

The 15% Tax Rate is Now a Campaign Issue

Morris Segall      Capital gains tax treatiment, Income disparity, Socio-economic crisis, Tax rates affect primaries, Taxation a campaign issue, Taxation disparity, Taxation of wealthy

We have repeatedly commented on the growing frustrations of the American public regarding increasing income disparity and inequality.  In our website article of March 23, 2009, ” I am Mad as Hell…, our blog video of October 11, 2011 addressing the “Occupy” movement and our website article of October 21, 2011 titled “The Angst and the Fury,” in which we wrote,” The American model of market-driven capitalism is not working for millions of people here and abroad and no one can understand why and what they can do to solve their predicaments.”  Further, “Compounding this fear and frustration is the failure of democratically-elected governments in the U.S. to act in the public interest…most people have lost faith in government to lead and solve the deep seated problems plaguing their populations.”

Nothing embodies these statements more than the debates over inequality in our nation’s tax code, particularly the tax treatment of investment income versus wage and salary income. As the gap between the wealthy and the middle class grows, the problem becomes more evident and harder to ignore.  In fact, the topic recently emerged as a hot button issue in the 2012 Republican primaries. We are convinced Mitt Romney lost the South Carolina primary, an election he had all but won less than a month ago, after he revealed that he paid a tax rate of 15% on his income for 2011. Now he is fighting to keep his lead in Florida after being the heavy favorite in the polls before his income tax revelation in South Carolina.

So why are many wealthy Americans paying lower tax rates than average middle-class citizens? While federal income tax rates are progressive, with the highest earners taxed at 35%, many of the wealthiest individuals have a substantial portion of their income in capital gains (profits from the sale of stocks, bonds, and real estate) and dividends as opposed to wages.  According to present tax code, these income sources are taxed at a rate of just 15 %.  Therefore, anyone making over $34,500 a year in wages and salary is taxed at a higher rate than a multi-millionaire taxed on millions in income treated as capital gains.

Republican candidate Mitt Romney provides a good example of how the wealthy can use the preferential treatment of income classified as capital gains and dividends to minimize payments to the federal government.  In 2010, Romney made a total of $21.6 million and paid $3 million in taxes.  This results in an effective tax rate of just 13.9 %- a rate that is less than half the top marginal rate on wage incomes. Over half of Romney’s earnings were considered capital gains and dividends and were taxed at a top rate of 15 % rather than the 35% top rate for ordinary income.  After dealing with years of high unemployment, slow job growth and essentially stalled income growth, the American public is not going to ignore the fact that people with a lot of investment income pay much less tax on that income than people whose income is earned from wages and salaries.

The Romney tax revelation has been picked up by the President in his State of the Union address and is now a full fledged campaign issue that will extend through the election season and in the current debate on federal government deficit reduction. We have been expecting this and believe it is appropriate to address this issue as part of our long term federal fiscal debate and socio-economic crisis that has developed as a result of increasing income disparity. We will address this and other issues affecting our long term federal fiscal dilemma in an upcoming “white paper” article on our website.

Morris R. Segall

The Super Committee fails: Now What?

Morris Segall      Bush tax cuts, consumer spending, democrats, Economic Growth, economic outlook, employment, eroding middle class, future trends, mandatory federal spending cutbacks, military spending, public education impairment, republicans, U.S. credit rating downgrade, U.S. economic and military superiority

Yesterday’s announcement that the Bipartisan Congressional Committee, charged with formulating a long term deficit reduction plan, could not come to an agreement on such a plan was anti-climatic. It had been rumored for weeks that the members of the committee were far apart on critical issues and by this past weekend, it was apparent no agreement was going to be reached. We had long been skeptical this committee was going to succeed (See our blog video of October 7) but we felt there was a chance statesmanship would triumph over politics at the eleventh hour. We were wrong. We have commented since last summer’s near disastrous debt limit negotiations that the ideological divide between Republicans and Democrats is so wide that the parties are incapable of bridging the gap, even when the well being of the nation is at stake. It will reside in America’s voters in next year’s election to decide this country’s long term public and fiscal policy by electing a President and Congress of one political party or the other. A split vote that results in continued divided government in Washington will be a formula for economic and social disaster.

In the meantime, Congress must fund the government past next month and decide if it will extend last year’s tax breaks via a reduced payroll tax on wage earners and extended benefits to this nation’s chronic number of long term unemployed. In the present partisan atmosphere in Washington, none of these important issues can be counted as certain of passage. Failure to pass any of these items will certainly diminish the economic outlook for next year at the least, and potentially plunge this country into economic chaos at the worst, if the government is shutdown for lack of funding.

Beyond the immediate issues affecting the economy for next year are the prospects of mandatory federal budget cutbacks and the expiration of the Bush tax cuts in 2013 as a result of the failure of the “Super Committee” to fashion a long term deficit reduction package. The combination of increased taxes and federal government spending cuts will result in higher taxes, particularly on the already stressed middle class, and significant reductions in federal assistance in vital areas such as education, again disproportionately affecting middle and lower income sectors of our economy. At the same time, mandatory federal spending reductions will fall heavily on the Defense Department causing drastic cuts vital to our national defense while our strategic enemies are increasing their defense spending and closing the gap on our technological superiority. It is this technological superiority, through necessary research and development, that allows us to field a world class military with fewer numbers than our adversaries. Oh and by the way, defense spending cutbacks of approximately $500 billion over the next ten years are estimated to cost approximately 1 million defense related jobs according to estimates by the Defense Department.

The sum of such fiscal developments, we believe, will be a low level of economic growth on an extended basis from suppressed consumer income and spending and continued high levels of unemployment. Erosion of our public education system to the detriment of a future generation of students and impairing our ability to compete in the world economy. This combination may well result in the creation of a burgeoning number of low income earners replacing what has historically been a growing and thriving American middle class. The disparity between the “haves” and “have nots” will reach historic proportions threatening the future social, economic and military superiority of the U.S. Lastly, there is no guarantee that such mandatory spending reductions will stave off a further lowering of our credit rating. Indeed, we expect the rating agencies will be taking an unfavorable opinion of our economic prospects in the near term. Lower spending matched by lower tax receipts may not result in the improved federal fiscal situation necessary to maintain our AAA credit rating. In short, absent a robust economic recovery, hallmarked by substantial job and income growth, the future social and economic outlooks for this country are not encouraging.

Morris R. Segall

The June Employment Report: Now we are getting pessimistic

Morris Segall      business spending, Capital Markets, consumer sentiment, consumer spending, debt default, deficit reduction, democrats, Economic Growth, economic recovery, future trends, inflation, job creation, June employment, obama, recession, Republican Party

Today’s employment report for the month of June is unequivocally a blow to expectations that May’s weak report was an aberration.  Instead of rebounding from May results, the June report deteriorated in virtually all key aspects  of employment. Nonfarm payrolls increased by a neglible 18,000 jobs, the weakest level of job growth in nine months. To make matters worse, the Labor Department revised downward its previous readings on job creation in April and May by a combined 41,000 jobs, including a 29,000 job reduction in May to 25,000 from an already weak level of 54,000 jobs. The June report and the April-May revisions reveal a virtual absence of job creation since April. Of the 18,000 jobs created in June, 57,000 were created in the private sector, offset by a reduction of 39,000 jobs in federal, state and local governments. Of the 57,000 private sector jobs the vast bulk of these, (34,000),  were in the Leisure and Hospitality sector- low paying, seasonal and tenuous given its sensitivity to the economy. According to the Household survey, the unemployment rate reached a year to date high of 9.2% in June despite a contraction in the labor force of over 270,000 from May levels. In addition, the June Household survey showed an increase of 173,000 in the number of unemployed workers and an increase of nearly 450,000 persons not in the labor force. Other statistics from the June monthly report include: a recessionary employment/population ratio of 58.2%; a $.01 decrease in average hourly earnings resulting in no increase in average hourly earnings since April; a decrease in the average workweek and factory overtime; an increase of 100,000 in the number of discouraged workers from May to nearly 1 million persons; an overall increase of 474,000 in those categorized as marginally attached to the labor force from May to a level of 2.7 million people; and an increase of over 400,000 from May in the number of unemployed less than 5 weeks to over 3 million persons. In June, the percentage of workers unemployed, those marginally attached to the labor force and those working part time because they can’t find full time work amounted to over 16%, the highest level this year. Two years after the recession ended, these numbers are unprecedented in post-war economic recoveries.

In our June 7th website article on May unemployment data, we concluded that the May data had been suppressed by the severe storms in the south and mid-west in April and May and the supply dislocations in Japan. We saw reassuring data in the May report that encouraged us to believe we were not on the verge of a double dip recession. Unfortunately, the June report contained none of those positives and should be relatively unimpeded by exogenous events. We believe  the June data confirms our fears that the business sector has retrenched in its spending since March, insecure in the outlook for consumer and customer end demand given the high levels of inflation and pressure on incomes and profit margins and deteriorating economic conditions in major markets overseas. This is confirmed in the underlying weakness in the June ISM manufacturing survey ( See our website article on the June Manufacturing Survey), and the weakness in the June ISM non-manufacturing survey, both released earlier this week. This retrenchment now appears to include a reduction in hiring.

This business spending retrenchment will have enormous implications for economic growth for the remainder of this year and into next if not reversed. An economy that does not provide job growth cannot grow. We have long focused on business and consumer spending as the drivers of economic recovery in the absence of contributions from housing and the government sector. Business retrenchment in spending and hiring will remove both of those drivers from the economy. The absence of private sector job creation will soon be reflected in reduced consumer sentiment and spending. Reduced consumer spending will slow business sales and pressure corporate profits causing businesses to retrench further. The net result is an economy that does not grow and one that could easily fall back into recession. We commented in our last website article how important the June employment report would be for the future direction of our economy. With the June numbers showing such employment weakness, we are now pessimistic the second half of this year will show renewed economic growth and the outlook for 2012 has become decidedly less sanguine. We expect to revise downward our expectations for GDP growth for this year to the bottom of our 2%-3% range and we may have to reduce our projections further if current economic trends persist.

We expect the weak June employment data to complicate if not preclude an agreement on raising the nation’s debt ceiling. The weakness of the June report will, in our opinion, harden the resolve of Republicans to reject revenue raising measures advocated by the President. The same employment weakness will, in our opinion, also strengthen the resolve of Democrats to avoid stringent federal spending cuts, particularly in entitlement programs. The current weakness in the economy will widen the ideological chasm between the political parties. Thus, we are not optimistic a far reaching deficit reduction program will be reached in the next two weeks. Rather we now believe a stopgap measure to avoid government default, possibly through the end of the current fiscal year, will be the only agreement that can be fashioned.

Clearly these events and the current economic environment are not conducive to stock market appreciation. In view of the recent rally in stock prices at the end of June and the first week in July, we believe the equity markets have increased downside risk and less upside potential. We would advise a more defensive and risk averse capital market strategy in light of present circumstances.

Morris R. Segall

S & P Joins the U.S. Budget Debate

Morris Segall      austerity programs, bailout, business confidence, business landscape, Capital Markets, consumer sentiment, consumer spending, Economic Growth, economic recovery, federal deficits, future trends, GDP, national debt, politics, recession, tight credit

This morning, Standard and Poor’s downgraded the U.S. credit rating outlook from stable to negative. The rating agency cited the high level of public debt as a percentage of GDP and the uncertainty that adequate actions to significantly reduce the U.S. debt level and maintain it at manageable levels would be undertaken in the forseeable future. The negative outlook and the reasoning behind it portend a “one in three likelihood of a lower long-term credit rating on the U.S. within two years” according to the text of the S & P release. Standard and Poor’s states the leverage on the U.S. balance sheet and accumulating annual deficits are higher than other countries with sovereign debt ratings of AAA.

We are not surprised by the S & P action. Indeed, in our website article of September 8, 2008, “Stocks, Recession and the Bail Out” we cautioned that the massive federal bailout of the housing and banking industries would add billions to annual deficits and the national debt. We further stated “The cumulative effect of ballooning annual federal deficits, the secular pressure on the federal budget from increasing entitlement spending and the continuing balance of trade deficit may lead to a downgrade in the U.S. government credit rating and a further aversion to U.S. dollar denominated assets longer term”. The extended decline in the U.S. dollar versus other currencies has reached historical proportions in the first four months of this year, even against the financially questionable euro. 

While we are not surprised by the S & P action, we are surprised at the timing of the ratings outlook. Why now in the heat of the budget debate between Congress and the President? Why didn’t Standard and Poor’s wait until mid May after some decision on the federal budget and increase in the debt limit would have been forthcoming? It is our opinion that by releasing this downgraded credit outlook now, it would have a significant impact on the budget deliberations and possibly tilt the argument in favor of more draconian spending cuts as advocated by the Republicans in Congress. It is not unreasonable to believe that outside credit analysts, rating agencies and economists have come to the conclusion that the U.S. must adopt an austerity spending program similar to those adopted by the European Union as a solution to its excessive debt burden. By using a time frame of three years (similar to that employed in the European austerity programs) to measure progress, S & P makes the same mistake such a short time period has created on the countries in Europe. It is simply too short a period of time to deleverage sovereign balance sheets without stifling critically needed economic growth to provide the means to paydown debt (See out website articles of December 17, 2010 and March 15, 2011).

Today’s ratings outlook release by Standard & Poor’s misses important differences between the U.S. economic situation and those of Ireland, Greece, Portugal and Spain. The U.S. economy is in recovery led by manufacturing, exports and more recently consumer spending. Employment gains have accelerated since last November. While the recent surge in inflation has slowed U.S. economic growth coming out of the first quarter of this year, the recovery trend is not aborted. It will be if the Federal government is forced to make drastic spending cuts which will reverse its role as an economic stimulant to an economic depressant at this sensitive point in the U.S. economic recovery. We argued in our economic articles on Europe and once again, that longer periods of time are required to deleverage these balance sheets. A longer period of time will allow the national economy to grow at a rate to raise tax receipts and pay down debt. We have long been advocates for greater fiscal discipline by the U.S. government that includes large spending cuts and higher taxes. However, a nation in recession cannot reduce its debt to GDP ratio.

By releasing its downgraded U.S. ratings outlook today, Standard and Poor’s has entered the political debate and abandoned its role as a neutral and impartial arbiter of credit conditions. Furthermore, the surprising timing of this release has caused capital markets here and around the world to decline significantly, further eroding asset values and wealth and business and consumer confidence already battered by overseas events in Japan, the Middle East and Europe. Declining capital markets and consumer and business confidence will lead to tighter credit conditions at a time when credit was just beginning to “loosen up”. This in turn will lead to investment and spending retrenchment, threatening the nascent economic recovery here in the U.S. The worries of a deteriorating U.S. financial condition in 2012 and beyond could be self fulfilling as a result of what we believe is an ill timed alarm. We will have to see in the coming days if the S & P action is transitory or longer lasting in its impact. 

Morris R. Segall

The Budget Wars: Now beginning

Morris Segall      bailout, budget deficits, democrats, financial Armageddon, fiscal wars, national debt, national economic philosophy, new fiscal discipline, obama, politics, republicans, U.S. government default, U.S. government shutdown

Last week’s melodrama leading up to the eleventh hour avoidance of a Federal government shutdown is just the beginning of the new fiscal wars over the U.S. budget for this fiscal year and beyond. The discussion of U.S. fiscal policy has now turned from stimulus, bailouts and economic recovery to debt reduction and redefining the role of the Federal government in the economy. Starting with the release of the Republican led House Budget Committee’s aggressive plan for deficit reduction, followed by steadfast demands for major reductions in federal spending  to avoid the government shutdown, the Republican party has now shaped and defined the fiscal discussion and taken the lead from the President and the Democrats in Washington. The President, on the defensive, will reveal tomorrow evening his plan for reducing projected federal deficits going forward and lowering the level of the national debt as a percentage of our GDP.

In arriving at their compromise last week on nearly $39 billion in spending cuts for this fiscal year, the President was fortunate in being able to utilize a number of “one time” program reductions, cost cuts already approved by Congress and unused funds from previously adopted appropriations. This “low hanging fruit” may be as much as $20 billion of the $38.5 billion compromise. The President and the Democrats in Congress will not be so fortunate going forward. The President knows he must propose a credible deficit reduction program in an attempt to get Republican cooperation in raising the federal debt ceiling by early May. Such a plan will likely include tax increases as well as significant spending reductions. The President and his party will try to salvage as much of their fiscal and social agenda as possible.

Given the strong philosophical differences between the parties, we believe the President’s submission tomorrow evening will be rejected as insufficient and inclusive of unwelcome taxes by Republican hard liners in the House of Representatives. Another period of gamesmanship between the Republicans in the House and the President and the Democratically controlled Senate will ensue between now and early May, when the government will run out of money, to attempt a budget compromise and avoid a federal government default. The parties will use this period to blame each other for taking the country to financial Armageddon. We are optimistic neither party want to be held responsible for that and last minute concessions will avert disaster.

We have long warned of deteriorating federal finances, long before the recent recession, and been critical of the burgeoning federal debt, unsuccessful fiscal “ bailout” and excess liquidity programs to the extent we have been steadfastly pessimistic in regards to the long term U.S. financial and capital markets outlooks. We are in the process of examining the federal financial situation and the proposed solutions in an upcoming website article. However, the current chain of events and resulting dialogue represents a sea change in our national economic thinking and philosophy. The potential economic changes resulting from a new fiscal discipline in Washington will have profound impacts on all of us, our children and grandchildren.

Morris R. Segall

The 12th Congress: And We’re Off

Morris Segall      federal debt ceiling, government funding, new Congress, political gridlock, reduce federal government and national debt, Tea Party conservatives

Tomorrow the 112th Congress will be sworn in and members of the new Republican majority in the House have already declared their first order of business will be the repeal of President Obama’s healthcare legislation enacted last year. It would appear the bipartisan cooperation of the lame duck Congress last month  is over and the ideological divide resulting from the November elections will be prevalent particularly in the House. Of the 242 new Republicans in the House, nearly 90 will be conservatives ideologically aligned with the Tea Party. They will represent a large, dogmatic contingent committed to reversing the legislative and fiscal spending programs of not only the Obama administration but those of the Bush administration as well. They feel empowered by the mid term elections to move forward with a concerted effort to cut federal spending, reduce the size and power of the federal government and reduce the national debt. Their efforts will cause friction within the Republican party whose mainstream leadership is committed to producing legislative results that will produce jobs and help the economy. Nonetheless, the House Republican leadership has announced its intention to cut $100 billion from the Federal budget this year as a concession to the “Tea Party” agenda. Details of where the cuts will come from are missing. Keeping the hard line conservatives “in line” will prove a challenge to the Republican leadership.

While providing a challenge to the Republican party leadership, the new, hard line conservatives will represent an attack force to the Democratic Party whose slim majority in the Senate will have to hold back efforts to undue their legislative programs of the past two years and their legislative legacy of the past seventy years. The partisanship that has intensified since the Clinton administration promises to become more vehement given the rhetoric and promised zeal of the newly elected conservatives. One thing is certain. The federal largess doled out over the last two years to “jump start” the U.S. economy is over. The level of federal stimulus promises to be reversed by the new fiscal conservatives and that will force the private sector to fill the void and carry the burden of economic recovery going forward. It remains to be seen if the private sector can successfully accomplish that task.

In the meantime, the first battles between the parties and the President will be the funding of the federal government and the raising of the debt ceiling. The current continuing resolution funding the federal government expires in March and the current debt ceiling of approximately $14 trillion is expected to be reached in the spring. At this time, the rhetoric from the Republican conservatives indicates opposition to raising the debt ceiling and refusal to fund the government without substantial fiscal and regulatory reductions. We expect a game of “chicken” for the next two months as we near the deadlines for both. We expect the President to be conciliatory as he continues to move towards the political center, avoid devastating gridlock and attempt to paint his Republican opposition as irresponsible and unable to effectively serve the body politic. The President wants to get re-elected in 2012 and he stands to win politically if the Republicans grind the government to a halt.

Stimulus is in place for aiding the economy and the stock market in 2011. The new Congress will decide the future trends in both thereafter.

Morris R. Segall