Monday, March 15, 2010

The Economic Recovery Fairy Tale

Although many government sources have claimed that the economy has been in a recovery period, Moses Kim argues that the economy is an weakened state. Areas of concern are the ongoing government budget deficits, high levels of foreclosures, and low levels of optimism among small business people. See the following article from Expected Returns for more on this.

The propaganda about an economic recovery is reaching epic levels. It has gotten to the point where the government must conjure up ridiculous excuses for our economic perils, such as the pernicious phenomenon known as.... winter.

By my calculations, the phantom economic recovery has been dragging on for a year. In that time frame, economic conditions have clearly worsened. Fundamentally, and perhaps most prosaically, there are no jobs. Yet we are to believe the economy has recovered simply because the government says so. It baffles me that anyone still listens to the same people who led us off the cliff in the first place.

Recent economic reports suggest that the economy is still weak, and that this weakness is likely to persist.

Record Monthly Budget Deficit

The government just announced a record $221 billion dollar deficit for February, which brings the total deficit for the first 5 months of the fiscal year to $651.56 billion dollars. This puts us well on track to exceed last year's record $1.4 trillion dollar deficit. There is no doubt in my mind that we are on our way to fiscal ruin.

Government spending is fine as long as it helps the average person without imposing burdens on the taxpayer that exceed benefits. Unfortunately, the government has irresponsibly spent trillions of dollars of taxpayer money with the only measurable effect being outsized bonuses for bankers. Of course these bonuses were well-deserved, since according to Obama, resident banking gurus Dimon and Blankfein are "savvy investors." Sureeee. Savvy investors that can't survive without billions of dollars in implicit and explicit government guarantees. But I digress.

Foreclosures Slowing?

The latest spin is that foreclosure filings are increasing at a slower rate. Foreclosures were only up 6% from last year in a clear sign that "green shoots" are sprouting left and right.

While the 308,524 foreclosure figure is pretty horrific historically (for some perspective, 405,000 households lost their homes in 2007), the figure is actually skewed since many of the 1 million homeowners who qualified for a temporary modified mortgage under the Home Affordable Modification Program (HAMP) will not receive permanent modifications. We should be seeing many of these homes hit the market in the months ahead.

Unemployment Remains Elevated

Today the Department of Labor announced that 462,000 individuals filed for initial unemployment claims. The 4-week average increased by 5,000 to 475,000 in a sign that the unemployment picture remains weak.

Small Businesses Remain Bearish

The index of small business optimism fell in February to 88, with small business owners citing poor sales as their main concern. Due to the weak sales environment, more firms announced plans to cut jobs than to add jobs.

The optimism index has held below 90 for an unheard of 17 straight months, which in the past has suggested a recessionary environment.

It's logical to pay attention to what small business owners are saying, especially since they are responsible for over half of the employment in America. Because of their effect on hiring in America, and since in the real world a recovery cannot occur without an increase in hiring, small business owner sentiment serves as a reliable leading indicator.

At the very bottom of the 1982 recession, a net 47% of small business owners saw improving business conditions ahead. Currently, a net -9% see improved business conditions in the months ahead. It's pretty clear that the outlook is bearish on main street.

The fairy tale that our economy is improving truly defies logic. While another round of "less bad" economic statistics can potentially create the illusion of a recovery in the months ahead, I believe by the end of 2010 and into 2011, it will be nearly impossible for anyone (besides the government) to deny that we are in one serious economic downturn.

This article has been republished from Moses Kim's blog, Expected Returns.

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