Economics: A Mental Recession
WESBURY, BRIAN
Economics A Mental Recession The U.S. economy continues to grow, but no one wants to believe it. by Brian Wesbury I I n my 27 years of business forecasting experience I...
...Faber: Which surprises you...
...Excluding the housing sector, real GDP has grown 2.9 percent in the past year...
...Inaddition, financialinstitutionsarewritingoffhundredsofbillionsofdollarsinlosses...
...Thisunderminestheeconomyinmanyways...
...Others say it is just a matter of time and have kicked their forecasts further down the road...
...FormerSenatorPhilGrammcalledita“ mentalrecession” andwasblastedforbeingoutoftouch, evenbyhisbossSenatorJohnMcCain...
...He adds that his consumeroriented businesses are doing well, but he remains convinced that this cannot last...
...Faber: So you know it’s coming, it’s just a matter of time...
...Here’s more along these lines from the CNBC transcript (emphases added): Faber: Let’s start off on the economy...
...Diller: Has to be...
...Manyoftoday’sdour forecastershavemade thecasethatrecessionsasfarbackas1973havebeencausedbyrisingoilprices...
...Available wherever books are sold...
...But so far, real GDP has only shown one littlebitty drop of 0.2 percent in the fourth quarter of 2007...
...EventhoughGrammisright, hefailedthepoliticallycorrecttest...
...Diller went on to say that he didn’t think he would have to lay off workers, and he agreed that people would still use Ticketmaster because even in tough times they want to be entertained...
...However, ifapeakinoilpricesof$ 36abarrelcausedarecessionin1990– 1991,howcomeoilpriceshavebeenoverthatsince2004andtheconsumerisstillspendingwithnorecessionyet...
...S.financialsystematatimeofneed...
...Whenthesethreethingsareinplace, recessionshaveneveroccurred...
...Takehighoilprices...
...Itartificiallyboostscapitalgainstaxratesbecauseeveninflatedgainsaretaxed...
...BailoutsandgovernmentregulationthreatentoscareinvestorsawayfromtheU...
...Rather than trying to understand why the consumer has been stronger than expected, Diller and the reporters seem to dig in their heels...
...140 a barrel of oil, you gotta believe they are going to give it up sometime right...
...Allofthissuggeststhatthepessimismofsomanypeoplethesedaysisbasedonfeelingsandnotfacts...
...These are not the data one would expect in a nasty depressionlike downturn...
...He says that the consumer is on deathwatch...
...Asaresult, theconsumerhaspentupdemand...
...And yet, you see it’s doing extremely well, surprisingly enough, in consumer electronics...
...I mean, eight months ago you were looking for the consumer to really start to fall off a cliff as have many people...
...Memoriesareshortandexplanationsaretoosimple...
...Pockets of it, for instance, in Interval, which is having growth year over year, but in fact the integral business, which is a time share business and its essentially people—it’s an exchange, so people trade, they’re aware they’re going on holiday etc, and the number of exchange actions has been slowing recently...
...Forexample, manyareconvincedthatfailingbanksandlargeloanlosseswillleadtoacreditcollapse...
...Buttheeconomyhascontinuedtogrow...
...Again, Expedia is actually doing very well...
...I mean I think it’s this one, you know this that thing that they say about, you know, when somebody’s very very sick and they come to the end and they say hours or days in terms of the finality timeline, I think that’s all it’s a matter of...
...Itdistortspricesandsendsoutconfusingsignalstoproducersandconsumers...
...Since then, the economy has actually accelerated with a 0.9 percent real growth rate in Q12008 and 1.9 percent in the second quarter...
...You and I have not done an interview in a long time, but the last time we did, we were outside, it was a while ago, and you said ‘we were in a recession’ then, so I can only imagine what you think now...
...Gasandfoodpricesareupandhousingpricesaredown...
...40 THE AmERicAn sPEcTAToR sEPTEmbER 2008...
...TheyaregeareduptoproducetrucksandSUVs, notcars...
...Yet if you look at it, if you look at it actually in terms of the perfect stats, the consumer is still spending...
...AndtheNew York Timeseditorialpageisblamingtaxcutsforhelpingtofuelexcessivespeculation, anargumentiffollowedtoitsconclusion, wouldresultineconomykillingtaxhikes...
...Intheend, asFranklinDelanoRooseveltsaidinhisfirstinauguraladdress, “ theonlythingwehavetofearisfearitself...
...You see it in North America in certain areas of Expedia...
...economy continues to grow, but no one wants to believe it...
...www.simonsays.com sePTeMbeR 2008 THe aMeRIcan sPecTaToR 39 Economics P P essimism is interest ingandfrus trating.Itassumes thatifthingshaven’t gonebadyet, itisjust amatteroftimebefore theydo...
...Finally,inflationisrampantforthefirsttimesincethe1970s...
...Diller: Pockets of it, we see pockets of it...
...Tryingtorunashardasa16year-oldwhenyouare45canpullahamstring, butthisdoesnotmeanyour45yearoldbodyisinbadshape...
...AndnonhousingrealGDPisup3.6percentinthepastyearandwilllikelyriseover4percentatanannualrateinthethirdquarter...
...However, thisistheresultofexcessiveleverageandrisktakinginthepastwhentheFedwasholdingthefundsrate at1percent, notatrulysickeconomytoday...
...B B ut none of this signals thedeathoftheeconomy...
...But apparel, in home, the home, in many different ways, all of the obvious stuff...
...Where’sthe introspection?Where’s thewillingnesstolook beneaththeemotion...
...Housingisstillcorrectingfromitsoverbuiltcondition, inflationhasboostedenergycostsandthishascausedasharpdropinautosales...
...Moreover, theU...
...Unfortunately, whenpoliticsenterstheequationitbecomesaboutfeelings, notfacts...
...And that’s very clearly an economic indicator of pocket books are stretched...
...CNBC’s Maria Bartiromo summed this up in a question: “He was pretty negative on the economy there, and the consumer, huh...
...by Brian Wesbury I I n my 27 years of business forecasting experience I have never seen so much unjustified economic pessimism...
...Othersbelievethatfallinghomeownerwealthwillleadtoaconsumerpullback.But, between1980and1994, morethan2,900banksandS& L’sfailed, whilerealGDPgrewata3.3percentaveragepace...
...Rather than throw in the towel and come to the conclusion that the U.S...
...Itistruethatpeoplearenothappy...
...Becausemonetarypolicyishighlyaccommodative, taxratesarestilllow, andproductivityisstrong, thefutureoftheeconomyisbrighterthanmostpeoplethink...
...William F. Buckley, Jr...
...Itisimportanttounderstandthateverysectoroftheeconomyisnotstrong...
...The truth is, consumer spending, in various pockets of course, but generally the consumer is still spending...
...And now that subprime loan failures have not caused a recession, pessimists say skyhigh oil prices will...
...I don’t think for very long but— bRIan wesbuRy Faber: Well you have a number of businesses that touch the consumer, are you seeing evidence at this point...
...You touched the consumer— Diller: The amazing thing is, the amazing thing is, I thought then on what I—what didn’t happen then is that consumer spending really did not drop...
...brian Wesbury is chief economist for First Trust Portfolios, L.P...
...Consumer spending has not had a single negative quarter of growth in the past year, or for that matter, since 1991...
...Economics A Mental Recession The U.S...
...And the question is how long, under these conditions, real estate, finance, etc., how long under these conditions, can the consumer keep spending...
...Productivity is strong, business construction is up 16 percent in the past year, while exports are up 18 percent...
...New from the Publisher of The American Spectator “A masterful account...
...Robert D. Novak “Marvelously thought out and marvelously executed… leaves the reader panting with gratitude for his accomplishment, and smiling for his felicity...
...ButinJune, automanufacturerscouldhavesoldanadditional40,000orsocarsiftheyhadthem...
...Employmentlossesinconstructionandautomanufacturingmorethanaccountforallthejoblossesintheeconomy, butotherareasarebooming...
...Whatcouldbeworse...
...By the way, it seems, I don’t think it’s about predicting...
...So I mean it’s all just starting to wash through...
...Ithasbeenamentalrecessionafterall...
...Unfortunately, this pessimism is truly dangerous and misplaced...
...Thisiswhyinitialunemploymentclaimsremainbelowthethresholdnormallyassociatedwithrecession...
...Finally, itdrivesupthecostoflivingfasterthanwageratesandunderminesconsumerconfidence...
...Diller: You would think...
...You see it at HSN...
...Joe Sitglitz, chief economist at the World Bank and a former Clinton insider, has said the U.S...
...Nothing could be more revealing of this attitude than a CNBC interview of IAC Chairman and CEO Barry Diller conducted by David Faber last July 7. Diller says that, yes, he did predict a recession, but an “amazing thing” happened and “consumer spending really did not drop...
...Those that do use it are considered wise and levelheaded...
...There is no doubt that $4 gallon gasoline, widespread declines in home prices, failing financial institutions, and a sickly equity market are casting a long, dark shadow over economic perceptions...
...vividly portraying the conservative movement’s thinkers and activists...
...S.lost$ 7trillioninstockmarketwealthbetween2000and2002withabsolutelynocontractioninconsumerspending...
...RadicalinterestratecutsbytheFedhavealreadycausedoilpricestoskyrocket, andthishascausedmassivefinancialpainatairlines...
...HSN has got double-digit growth, in a retail business...
...Instead of focusing on the positive parts of Diller’s message, they all focus on the negative...
...economy is in the midst of the worst downturn since the “Great Depression...
...Politicians, economists, analysts, journalists, and business leaders who refuse to use the word “recession” are considered out of touch...
...economy is more resil ient than they thought, some pessimists argue that 38 THE AmERicAn sPEcTAToR sEPTEmbER 2008 the data are wrong...
...Theonlyfearthatoneshouldhaveisthatgovernmentreactiontoallofthisemotioncreatestheenvironmentwherearecessi ncouldoccur...
...Exportsareup18percentfromlastyear, whilebusinessconstructionisupalmost17percent...
...But broad measures of the economy remain much healthier than the doomsayers have forecast...
Vol. 41 • September 2008 • No. 7
