If you listen to the happy-talk folks at Treasury and the Fed, and on the tube, you’d think things had finally turned a corner. The economy grew at a 3.5% annualized rate in the third quarter ended September 30. “The Economy is Back in Gear” shouted the headline on an article by CNN senior writer Chris Isadore. “The recession ended unofficially in September,” said a reporter on NPR.
There was some mention of the fact that earlier in the week there were reports that consumer confidence had fallen, foretelling a sluggish Christmas retail season, and that new home sales slipped an unanticipatedly high 3.6% in September, when analysts had been expecting a rise in sales. Meanwhile, new unemployment claims filed during the third week of October jumped to 531,000, well above the predicted 520,000, indicating that the official unemployment rate is likely to top 10% in the next Department of Labor report due out in early November. As well, fully one-third of the nation’s homeowners were now said to be “underwater,” meaning that their outstanding mortgage balances are greater than the current value of their homes. Not surprisingly, foreclosures are continuing to surge.
How to explain this seeming oxymoronic situation? Well, that positive economic growth figure, which comes on the heels of a 6.4% decline in GDP in the first quarter and a .7% decline in the second quarter, is, according to government analysts, actually largely the result of two government stimulus programs—the “cash for clunkers” program that induced people to rush out and buy a new car (usually a much smaller, cheaper and, for the car makers, less profitable one than they had been buying in prior years), and the $8,000 new home tax credit, which led a lot of people to rush out and buy a first home.
The thing about those two stimulus programs is that they don’t so much expand economic activity as they push it forward. That is to say, a person who takes advantage of the cash-for-clunker program is generally someone who owns a worn-out junker and needs to buy a new vehicle anyhow, so what the government subsidy does really is just push that purchase forward. Once the program ended, sales of cars plummeted (not to mention that the bulk of the payments went to people who purchased foreign cars, so the economic boost was just for dealers in the US, not car makers). The same is true with houses. Very few people would make the decision about whether to buy a home or not based on just $8000, but the availability of an $8000 government subsidy for a limited time would lead people to push forward their plan to purchase a home.
What that means is, don’t count on this “recovery” to last into next year. The cars that needed to be bought have been bought, and the homes that people wanted to buy have been bought. The car subsidy is gone now, and even extending the home buying subsidy, as the realty industry lobby is pressing Congress to do, isn’t going to induce that many more people to buy.
Meanwhile it’s worth noting an oddity about this “recovery” being trumpeted in government and media. The relationship between the dollar and the stock market has become very strange. If you look back at stories on these two things to 2007, before the financial crisis hit, and earlier, you’ll see myriad articles explaining that the dollar and the US stock market tend to move in tandem. This was always explained as being because as the dollar strengthens, foreign investors want to put their money into dollar-denominated assets. Similarly, if the dollar weakened, analysts would write confidently that the stock market would be hurt as investors pulled their money out of US equities to invest in markets denominated in appreciating currencies.
Now, the analysts say that as equities strengthen, the dollar will fall, but if equities fall, the dollar will appreciate. The reason for this new inverse relationship should be cause for considerable alarm. Why? In fact, it turns out that the last eight months of a rising equities market has been largely the direct result of a shrinking dollar. This is because so much of the sales and earnings of companies in the S&P 500 and the much narrower Dow Index are earned overseas, denominated in foreign currencies, but accounted for on the books of these US-incorporated firms in dollars, that as the dollar declines in value, corporate sales and earnings appear to be growing. Reportedly, as much as 80 percent of the appreciation in the S&P Index since last March 9 when the market hit bottom can be attributed to the dollar’s fall against major world currencies.
Financial writers and reporters on TV don’t mention this tectonic shift. They just report the new relationship (Stocks up, dollar down, stocks down, dollar up) as though that’s they way it’s always been. But actually, this is a phenomenon has normally ben characteristic of Third World, so-called “developing” economies. That since the end of 2008 it has become characteristic of the US economy should be cause for concern.
So don’t be conned by the happy talk salesmen at the Fed and Treasury and in the White House, or by their propagandists in the newsmedia, who are trumpeting the latest GDP growth figure as a sign that the recession is over, apparently in the hopes that people will run out to the mall and start spending (in those remaining stores that don’t have their windows taped or covered in plywood). What we’ve seen was a blip on the chart, engineered by a couple of “going out of business” sales by the car and housing industry.
Real unemployment—measured the honest way it used to be 30 years ago, to include those who have given up looking for work or who are working part time involuntarily—is hitting 20% (for those who are bad at math, that’s one out of five working-age Americans). Foreclosures are hitting a record. Half of laid-off workers are cashing out their 401(k)s in order to buy food. State and local governments, both major employers, are hitting a wall as tax collections plummet and federal stimulus funds run out. This is not the foundation for a renewal of economic growth; it is the precondition for a renewed or prolonged recession.
And if the dollar continues its slide, which is likely given the US’s huge budget deficits and trade deficits, as well as the Federal Reserve’s inability to raise interest rates (a move that could strengthen the dollar but which would crush the economy), all those things that Americans buy abroad which are no longer made at home, as well as the oil that is imported, will cost that much more, driving consumers further into the hole. And remember, 70% of US GDP is consumer spending, a result of our decimation of our industrial base.
Recession ending? Don’t bet on it.
DAVE LINDORFF is a Philadelphia-based journalist and columnist. His latest book is “The Case for Impeachment” (St. Martin’s Press, 2006 and now available in paperback). He can be reached at email@example.com