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Why Obama Is in Real Trouble

Posted by Larry Doyle on May 31, 2012 5:33 PM |

It’s the economy, stupid.

Ultimately people vote their pocket book. To that end, this upcoming election should be very, very interesting.

A full three plus years after the onset of our supposed recovery and our economy remains plugged into Ben Bernanke’s life support. The European drag on the global economy is not going away anytime soon. In fact, if exacerbated the European fiasco may very well cause our own economy to fall back into recession.

On this note, how is our economy doing currently? 

For the best read on this most important topic, let’s review the work of Consumer Metrics Institute’s Rick Davis who recently released,  BEA Revises Second Quarter Growth Rate for 1Q-2012 Down to 1.88%,

In their second estimate of the first quarter 2012 GDP, the Bureau of Economic Analysis (BEA) lowered the annualized rate of U.S. domestic economic growth to 1.88% (down about a third of a percent from the 2.20% previously reported), and now more than a percent below the growth rate for the fourth quarter of 2011. This revision to the prior month’s report does not reflect actual monthly changes in the economy, but rather another month’s improvement in the BEA’s understanding of what was happening during the prior quarter.

The real net changes in the report came from slightly weaker consumer growth and a further deterioration of government spending — which between them made up the entire change in the headline number. Other than those changes this revision is notable for completely offsetting shifts in the growth contributions provided by commercial fixed investments (which strengthened slightly) and commercial inventories (which had offsetting weakness), and exports (strengthening modestly) and imports (deteriorating comparably). The BEA’s bottom-line “real final sales” improved very slightly to an annualized growth rate of 1.67% (from 1.61% in last month’s report) — which, like the headline number, continues to be anemic for an economy that is supposed to be nearly three years into a recovery.

The BEA continued to use “deflaters” that at first glance seem to understate the inflationary experiences of the public. To correct the “nominal” data into “real” numbers the BEA assumed that the annualized inflation rate during 1Q-2012 was 1.65%. As a reminder, lower “deflaters” cause the reported “real” growth rates to increase — and once again very low seasonally adjusted BEA inflation “deflaters” have contributed a significant positive bias to the headline number. In fact, if the raw “nominal” numbers were instead “deflated” by using the seasonally corrected CPI-U calculated by the Bureau of Labor Statistics (BLS) for the same time period the economy would have been reported to have been contracting at a -0.13% annualized rate.

What does this mean? Can you say, “the BEA is ‘cooking the books’ so as to give an appearance of some kind of growth? That’s right!!

And real per capita disposable income was still reported to be shrinking during the quarter — even using the BEA’s optimistic “deflaters.” We find it unrealistic to expect any kind of continued recovery (let alone a “robust” recovery) throughout 2012 with household disposable income dropping.

Among the notable items in the report:

— The contribution to the annualized growth rate for consumer expenditures for goods weakened very slightly to 1.44%, (down from 1.47% in the prior report, but still up 0.15% from the 1.29% for the fourth quarter of 2011).

— The contribution made by consumer services also deteriorated (to 0.47%).

— The growth rate contribution from private fixed investments improved significantly to 0.61% (up from 0.18% in the last report). But this number was nearly completely offset by a drop in the contribution made by inventories (now 0.21%, down substantially from the 0.59% reported earlier).

— The reported drag on GDP growth from contracting expenditures by governments grew somewhat at -0.78%, now nearly the same as the -0.84% reported for 4Q-2011. The largest share of the contractions continued to be Federal defense spending, although state and local governments still provided a net -.30% contribution to the headline number.

— The annualized contribution to the growth rate from exports rose to 0.98% (up from 0.73% in the prior report and materially improved from the 0.37% contribution provided in the prior quarter).

— Imports are now removing -1.05% from the growth rate of the overall economy, significantly worse than the -0.63% recorded during 4Q-2011. The net of foreign trade was still very slightly negative (subtracting -0.05% from the headline number).

— The annualized growth rate of “real final sales of domestic product” rose to 1.67%, but it is still a 1.49% below the +3.16% reported for the third quarter of 2011. This report’s improvement is largely the result of a weakening in the growth of inventories. If this number is accepted at face value (and not as a consequence of “deflaters” playing havoc with inventory valuations) it still indicates a much weaker economy than is conveyed in the headline number.

— Real per-capita disposable income shrank at an annualized -0.22% rate during the quarter (from $32,572 per capita to $32,554 per capita) — and it still remains lower than it was during the 3rd quarter of 2010, some 5 quarters ago.

Do you think the administration is discussing with Big Ben as to when he will come in with another dose of quantitative easing to goose the market pre-election? No doubt.

On this note…navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Obsvr-1

    Just rewards for the “Chosen One” … Obama said he wanted to change the business as usual in Washington, an boy did he …. for the worse.

    It’s high time we get out of this Obama-Nation …. argh.

  • fred

    LD, lets talk energy policy. Currently, one of the main contributors to jobs creation in this country is energy production.

    It’s too early for a major push into renewables, but why aren’t we going gangbusters to become energy independant.

    What I mean by this is we have a cheap abundant source of natural gas. NG can provide our entire energy nut for a longer period of time than global oil supplies, and, at a much cheaper price. The entirety of our domestic oil production could then be sold into global markets at inflated prices we can no longer afford to pay. We would be paid for our product rather than paying for someone elses.

    Future oil supply and demand will be driven by the PIGS, BRICS and OPEC rather than the US so let’s get on the winning side of this game. In the future, every time Iran decides to talk up prices thru nuclear investment our response could be ‘bring it on’ rather than our current response of ‘please don’t or else’.

    The only downside, I see, to NG is combustibility. This is no mountain for climbers like us; investment into chemical engineering should quickly provide a viable solution.

    Distribution isn’t a problem either, Big Enery can do some Capex and run pipelines down the center strips of our highways; land usage lease payments would then fill depleted state and local coffers. Car conversion kits are cheap, quick and easy.

    What are we waiting for?

    • john halsey

      There is a great book that helps explain this. Read CONFESSIONS OF AN ECONOMIC HITMAN by John Perkins. Reading between the lines, I don’t view our lack of policy aimed at energy independence as a democratic or republican thing. BYW, I do view Obama as a complete failure. But I believe we’va had a quid pro quo with our partners for years. Middle east-we’ll buy your oil if you fund our deficit. We’ve boxed ourselves in with our mountain of debt. These disingenious assholes in DC are all liars. Forever we’ve heard them say “we favor a strong dollar”. Sure. We’ve heard them say forever we want energy independence. Well, no we don’t. Simply because we can’t afford it.

  • coe

    two year in the low 20s/ten year rallying through 1.50%/unemployment naggingly entrenched in the numbers/Euro-zone problems in Greece/Spain/Italy et al/mortgage policy in shambles – America wallows while regulators are in gridlock – all of this and more on Obama’s watch…there comes a time when one has to say – are we ready for new leadership? if not, why not?

  • “Why Nations Fail: The Origins of Power, Prosperity, and Poverty,” by Daron Acemoglu and James Robinson, is a brilliant and sometimes breathtaking survey of country-level governance over history and around the world. Professors Acemoglu and Robinson discern a simple pattern – when elites are held in check, typically by effective legal mechanisms, everyone else in society does much better and sustained economic growth becomes possible. But powerful people – kings, barons, industrialists, bankers – work long and hard to relax the constraints on their actions. And when they succeed, the effects are not just redistribution toward themselves but also an undermining of economic growth and often a tearing at the fabric of society.

    It should come as a surprise to no one as to why the unemployment rate rose to 8.2%, and the economic recovery has stalled.

    • Peter S.

      “He who makes the rules takes the gold.”

    • coe

      very accurate observations…shame on the Obama -ites who feel they know best and why big government and socialism is the answer

      • Peter S.

        “He who makes the rules takes the gold.”

        An intentional consequence that benefits a few to the determent of most – I don’t believe that’s a good thing.

  • Peter S.

    By the way LD, your posting clock is off by an hour.

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