US Economy Ahead

In financial markets the business of the future is to be dangerous. Most of us have found that out the hard way, past quarters. Those whose income is dependent on discretionary spending - landscapers, plastic surgeons, restauranteurs, vacation-home realtors for example have especially taken it on the chin as the US economy remains in creep mode following the shock of Q4 ‘08.

Most have some idea of how we got here but little idea of how or when we’ll get out. Neither current economic numbers nor surveys of consumer or business attitudes are reassuring.

Few can insure against wild card events; surely there are more on the way but most of us can at least obtain some kind of tether, a modest leg up in anticipating economic reality ahead. That is the purpose of this sketch and those to follow.

Understanding near-term Fed policy is generally key to correctly anticipating growth. Not this time. The Fed has done about all it can. Liquidity is ample; corporations are cash rich. Instead, it is business attitude that needs to change. If we can anticipate that change we can to a large extent anticipate our own financial situations.

Problem #1) Employment is on hold. Large employers are afraid of the threat of well-advertised new burdens planned for them by the administration, all detailed in past blogs. Small businesses are afraid of the threatened tax hike - the Obama-Pelosi-Reid plan which will raise taxes on those making over $200M. As most small businesses are S-corps (tax pass through to the individual) these potential job creators have no reason for optimism. (Nor are investors encouraged as additional hikes on capital gains and dividends are planned by this trio.)

Problem #2) Washington’s spending spree. First the “stimulus” bill. As we predicted last year, gov’t spending did not create jobs on net. It is merely smoke. Next, the health heist and the financial regulation bill. Folks know enough now to reject the health bill; nobody knows what’s for certain in Dodd’s bill (one scary provision gives federal agencies powers to dictate pay at financial firms).

Not only are private-sector employers worried about new burdens, they are worried about anemic growth in general, looming deficits and tax hikes never ending. In the larger sense, private enterprise does no relish a future for the US as a social democracy, in the fashion of an economically stagnant Europe. Yet the perception by private enterprise is that this is where Obama and extremists in control of both houses, are taking us.

So understanding Fed policy ahead won’t help but understanding political reality ahead sure will. We’ve all got to become political strategists.

No one any longer argues that this administration and those in control of Congress are job killers. Thus, the greater the odds that Republicans take over the House and win enough Senate seats in November to ensure the ability to block legislation and block tax hikes, the more likely free enterprise will take heart and the engine will fire.

James Shirk of the Heritage Foundation summarizes for us: “Congress must recognize that a strong recovery and new hiring depends on the confidence businesses have in the future. Uncertainty is a fact of life for all businesses, but when Washington adds materially to that uncertainty, businesses invest less and hire less. The most powerful, no-cost strategy Congress can adopt is to stop threatening those in a position to hire—no more taxes, no cap-and-trade legislation, no government takeover of private health care, and no massive increase in the public debt.”


Robert Craven