Comparing the Political Parties and No Recession!
October 8th, 2024
ECONOMIC NEWS OF THE 3rd QUARTER, 2024
I WAS WRONG ON NO RATE CUTS! BUT STILL NO RECESSION IN SIGHT AND THE PROBLEM WITH RATE CUTS!
COMPARING THE TWO POLITICAL PARTIES' PAST ECONOMIC SUCCESSES AND FAILURES!
THE UNITED STATES ECONOMIC FUTURE (TRAPS LIE AHEAD)!
I WAS WRONG ON NO RATE CUTS!
These words (I was wrong) you have probably never heard from any politician, financial advisor, or economist. For the past 16 months, I have been stating that there would be no recession in 2023 and 2024 and that the Federal Reserve would not need to cut interest rates during that time. Well, two weeks ago I was proven wrong, with the Federal Reserve reducing the Federal Fund Rate by one-half of a percentage point, with a forecast of another half of a percentage cut before the end of the year and an additional one percentage point next year (2025).??
BUT STILL NO RECESSION IN SIGHT
I can understand why the Federal Reserve felt it needed to lower interest rates at this time; there are over a half dozen indicators that are currently signaling that we are already in a recession or near the cusp of one. The old adage of “an ounce of prevention is worth a pound of cure,” comes to mind. A partial list is the Negative Yield Curve-where the spread between the 3-month and 10-year Treasury turns negative; the Leading Economic Index from the Conference Board-compiles indicators on manufacturing activity and sentiment, stock, and bond market activity, consumer sentiment, and more; the Sahm rule or Sahm rule recession indicator-states when the three-month moving average of the national unemployment rate is 0.5 percentage points or more above its low over the prior twelve months, we are in the early months of a recession; and lastly the Michaillat Saez measure-which uses the unemployment and the vacancy rates, a measure of open jobs.
My difficulty with many of the new indicators of recession is they use the official U-3 unemployment rate for their formulas to calculate the possibility of a future recession. The U-3 unemployment rate has been around for nearly 75 years and is one of the most widely reported and discussed economic indicators along with economic growth measured as an increase in the Gross Domestic Product (GDP) and inflation; it is easy to report (even though few understand how we obtain the rate).
Many (if not most) economists believe it is too simplistic and fails to take in the whole unemployment picture. The U-6 unemployment rate includes those counted in the U-3 rate, plus those who previously had been looking for work but have become discouraged and given up looking for employment, and those who are working part-time, but would like full-time work and haven’t found it yet. The problem with the U-6 unemployment rate has only been around for 30 years.
One reason why politicians would hate the reporting of the U-6 unemployment rate is it would seem to show that the unemployment situation in the United States is worse than how it is currently reported. The U-3 unemployment rate hit a 55-year low in April of 2023 with an unemployment rate of 3.4%; currently it is 4.1% (September 2024). The U-6 unemployment rate hit a 30-year low in December of 2022 at 6.5%; currently it is 7.7%. This is way below the 30-year average of 10.1%, making the current employment situation very, very good.
The other labor statistic that should be looked at to review the health of the overall economy is the Labor Force Participation Rate. This rate represents the percentage of people over the age of 16 to 65 that is employed in the labor force. The Labor Force Participation Rate peaked in March 2000 at 67.3% and has steadily declined since then, and in November 2022 the rate hit a recent low of 62.1%. It has since risen to 62.7% in September 2024, with the long-term average of 62.8% (1948-2024). With this recent rise, it would seem that the labor market is still in a fairly strong position; coupled with a 4% rise in labor wages over the past year and an inflation rate of 2.5% during the same period, I don’t see a recession on the horizon!
I’m still in the camp that we are not going to experience a recession in the coming year. My rationale follows an “Occam's Razor” reasoning. The federal government has been pumping massive amounts of fiscal stimulus (budget deficits) into the economy, over $2.3 trillion last fiscal year (about $192 billion a month), equal to 8% of GDP. The United States has never fallen into a recession while the federal government has been pumping this much money into the economy!?
THE PROBLEM WITH RATE CUTS
I do worry about the recent and future rate cuts for two particular reasons: Asset Inflation and the overall inflation rate increasing next year. Looking at the stock market, housing prices, and the value of gold we might be looking at financial bubbles forming. The stock market is currently overvalued using the Shiller CAPE Ratio and Tobin Q Ratio that looks at the long-term value of stocks. The Shiller CAPE Ratio mean value is 15.02; it is now at 30.02. This places the value of the?
S & P 500 at 2,850 rather than today's value of 5,700. The Tobin Q Ratio mean is .938; it is now at 1.758. This places the value of the S & P 500 at 3,050 rather than today's value of 5,700. The average house selling price in June 2024 was $425,000, an all-time record high because of low supply and high demand. And recently gold hit over $2,650 an ounce, an all-time record high. The lowering of interest rates by the Federal Reserve will increase the value of these assets and move them more toward bubble territory. Bubbles become famous when they pop!!!
I understand that the Federal Reserve wants to stay out of politics. As Federal Reserve Chairman Jerome Powell has recently stated: “Anything that we do before, during or after the election will be based on the data, the outlook and the balance of risks and not on anything else.” I do think that the Federal Reserve needs to listen to what the two major party candidates are stating about their fiscal plans for the future. The Committee for a Responsible Federal Budget recently released its review of the Harris and Trump fiscal policy and their impacts on the federal budget deficit and the national debt. By their assessment, Harris's proposal will add $3.5 trillion to the national debt over the next ten years, while Trump's proposal will add $7.5 trillion to the national debt over the next ten years.
I wrote in July 2022, that inflation took off here in the United States because of a quinfecta of events. 1. Massive spending causing huge budget deficits by the Federal government. 2. Aggressive monetary policy of low interest rates and quantitative easing by the Federal Reserve. 3. A retreat from free-trade and the rising of tariffs and trade barriers. 4. A pandemic that hit the entire supply-chain of the world marketplace. 5. A war between Russia and Ukraine that affected energy and commodity prices for world consumers. With the data we now have, we can see that the major cause of high inflation starting in February 2021 and peaking in June 2022, by the extremely large fiscal stimulus put forward by the Trump administration during the fiscal year of 2019/20. The Trump budget added $4.23 trillion of fiscal stimulus (budget deficit) a record dollar amount into the economy. The “Time Lag” between when the stimulus enters the economy and the rise in prices is normally between 18 to 36 months. This puts the rise in inflation squarely in Trump’s economic plan and not Biden’s.?
The problem I see in the future is we know that neither party is interested in dealing with the national debt nor the budget deficit and both plan on making it worse (the Republicans more than the Democrats). The Federal Reserve lowering interest rates at the same time the federal government is stimulating the economy with a larger budget deficit might bring back inflation as a major economic problem for the United States.?
COMPARING THE TWO POLITICAL PARTIES
Just an interesting bit of economic history. The Republic of the United States of America has existed for 235 years. It took the United States 222 years to borrow $15 trillion and add it to the national debt. In the last seven years, the United States borrowed another $15 trillion.
Trying to compare economic records between the two political parties has always been difficult. You have political pundits cherry-picking their data to support whatever political party or ideology they align with. You have economists who don’t understand the political process and use whatever data is the easiest to obtain. You have news reporters, who don’t understand what they are reporting on and don’t even know enough about the right questions to ask or accept answers that don’t answer the question. And, you have a general public that has neither the time nor expertise to understand when they are being misled.???
My method, first I’ve limited the comparison of the two political parties to just a few economic areas that we have good statistical data on, and their definitions are generally accepted by most economists. Those areas are growth in the Gross Domestic Product (GDP), Job Creation, Budget Deficits, and the National Debt. How fast we grow the economy, how many jobs we create, and how we manage our fiscal responsibilities are about as basic of a comparison as you can get!
Second, I look at the data that corresponds with the fiscal budget passed by each President; this means I followed the fiscal year rather than the calendar year. We need to understand the single biggest impact any President has on the nation’s economy is the budget that they pass each year. We also must recognize how this process happens and what time period we need to follow. Prior to World War One, the federal budget was so small that its impact on the United States economy was limited. It wasn’t until the Budget and Accounting Act of 1921 was formalized that this process. Republican President Warren Harding signed into law this act on June 10th, 1921, to provide a national budget system and an independent audit of government accounts. This act required for the first time that, the President submit an annual budget for the entire federal government to Congress.
(Currently on the internet and with some talking heads on television, you will discover a myth being circulated that it is Congress that is responsible for the budget process. This is based upon Article One, Section 7 of the Constitution, which reads “All Bills for raising Revenue shall originate in the House of Representatives”. This deals with the raising of income for the government and has nothing to do with the budget process. Nowhere in the Constitution does it cover how the budget process is to happen. It is one of the reasons that the Budget and Accounting Act of 1921 was enacted.)
The act created the Bureau of Budget (later called the Office of Management and Budget (OMB)), which was a part of the Treasury Department but remained accountable to the President. In 1939, the Bureau was transferred from the Treasury Department to the Executive Office of the President.
Republican President Richard Nixon signed into law the Congressional Budget and Impoundment Control Act of 1974 on July 12, 1974, to establish the Congressional Budget Office (CBO); to establish a new congressional budget process; to establish Committees on the Budget in the House and Senate, and clearly stated that the budget process begins with the President. The President releases his budget request which outlines the Administration’s recommendations and priorities during February or March of their first year in office. The House and Senate then begin work on their budgets and establish a framework for the appropriators’ twelve spending bills, with the President giving input and guidance along the way and the President still having veto power over the final results. This budget process is to be done by September 30th for the start of the new fiscal year on October 1st. The last time Congress could complete the Budget process on time was in 1996!!!
A President of the United States is elected in November (for this example, let's say it's November 2000). The President does not take office until January of the next year (2001). In February or March of 2001, they submitted their first budget, it works its way through Congress and then supposedly is passed by September 30th. This means the President doesn’t have a lot of control of the economy until Congress passes their budget. So the first year the President “inherits” a budget from the previous President and at the same time during his last year in office, they give or “will” a budget to the next President. So the best time to measure a President’s economic success or failure is to start on October 1st, 2001, and end on September 30th, 2005 (for our example here of a one-term President). So all of the statistics and comparisons follow this timeline for each term of office for each President.
We will be reviewing the last six Presidents of the United States, comparing their individual results and then combining those results to compare the different political parties. We have had three Democratic Presidents (Clinton, Obama, and Biden) for a total of 19 years in office and three Republican Presidents (Bush (41), Bush (43), and Trump) for a total of 16 years in office, covering the period between 1989 to 2024.
GROWTH IN THE GROSS DOMESTIC PRODUCT
Listed from the fastest to the slowest annual growth rate of the GDP?
Average annual growth rate
William Clinton 3.7%
Donald Trump 3.0%
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Joseph Biden 2.8% est.
Barack Obama 2.4%
George H.W. Bush (41) 2.1%
George H. Bush (43) 1.8%
(Biden’s growth number is an estimate because we don’t have the 3rd quarter of 2024 in yet-I used the Federal Reserve estimate for this quarter.)
This means the average growth rate for the Democratic Presidents was 3.0%.
And for the Republican Presidents, it was 2.2%. That means the Democratic president's economic growth rate was about 36% higher than under the Republican Presidents.
JOB CREATION
Listed from the greatest number of jobs created and the average annual increase. Listed by the greatest number of jobs created on an annual basis.
Total jobs created average annual increase
Joseph Biden 10,213,000 3,404,333
William Clinton 19,718,000 2,464,750
Barack Obama 17,085,000 2,135,625
George H.W. Bush (41) 3,258,000 ? 814,500
Donald Trump 1,420,000 ? 355,000
George H. Bush (43) (-1,391,000) (-173,875)
The total jobs created under Democratic Presidents was 47,016,000. And, the total number of jobs created under the Republican Presidents was 3,287,000. This is a dramatic difference between the two parties!! Now I checked to see if I employed the more traditional method of when the President came into office rather than this method, and the results are even worse for the Republicans. Nearly 50 million jobs were created during the Democratic period, and only about 1 million jobs were created during the Republican period.
The last comparison I have is between budget deficits and the increase in the national debt. I’m using the figures from the Department of the Treasury because they keep a better record of the actual budget deficits created by the budget process. Listed is the total increase in the national debt by each President’s budget, the average annual increase in that debt, and the percentage of the GDP. (I’m using the 3rd year GDP for single-term Presidents and the 6th year GDP for two-term Presidents.) I’ve placed the Presidents in order of the lowest percentage of GDP to the highest.
Increase national debt Average annual increase % of GDP
William Clinton $1.396 trillion $0.1745 trillion 1.8%?
George H. Bush (43) $6.103 trillion $0.7629 trillion 5.3%
Barack Obama $8.335 trillion $1.0419 trillion 5.7%
George H.W. Bush (41) $1.554 trillion $0.3885 trillion 6.0%
Joseph Biden $7.036 trillion $2.345 ? trillion 8.6%
Donald Trump $8.184 trillion $2.046 ? trillion 9.6%
Breaking down the numbers, on average the Democratic Presidents have created jobs and growth in the GDP using deficit spending equal to 4.5% of GDP each year. The Republican Presidents have created jobs and growth in the GDP using deficit spending equal to 6.6% of GDP each year.?
THE UNITED STATES ECONOMIC FUTURE
I have always felt that Republican pundits could “sell ice cubes to Eskimos” (PC Inuits), while Democratic pundits couldn’t “give away water to a man dying of thirst, in the Sahara Desert.” Looking at the data above, why is every Democratic politician not yelling at the top of their lungs about their economic achievements? I just don’t get it! They have had greater growth, vastly more jobs created, and are fiscally more responsible, and yet they are silent on it. One question that leaps out in my mind is if during Democratic administrations they have growth, that creates wealth, that then creates jobs; during Republican administrations, they have growth, that creates wealth, then where does this wealth go if it's not creating jobs??? (47 million jobs created compared to just 3.3 million, it's not even close).
There are many tough economic choices ahead: we can not go back to a world that does not exist anymore and must deal with the world as it is today, not yesterday. The problem is that politicians keep on telling us that no one has to suffer and we continue to believe them!!!
Respectively Submitted
756 Worden Ave
Kalamazoo, MI 49048
Christian M. Staples
?10/05/2024?
3050