They Call This an Economic Recovery?

Third quarter numbers on the state of the economy are streaming out slowly this month, the latest being US economic growth figures. This number is important because it?s the last hard number on the state of the overall economy that will come out prior to the election. It?s the most objective indication of how President Obama is doing on the economy. It does not indicate that we’re in much of an economic recovery.

Hot off the press this morning is US economic growth improves to 2 pct. rate in Q3, (Yahoo!Finance, October 26, 2012). Note the use of the word ?improves?; it was just 1.3% during the second quarter. For the first three quarters of 2012, economic growth is averaging 1.74%, which is slightly behind the 1.8% for all of 2011.

The times have changed when it comes to an economic recovery

There was a time, not so long ago, when any growth rate of less than 3% would have been considered a warning sign to economic planners. It meant that a recession might be looming. Today, we look at rates of less than 2% and call that an ?economic recovery?.

It looks and feels more like bumping along the bottom, wouldn?t you say?

What?s most troubling is that, in theory, the Great Recession supposedly came to an end in June of 2009. If that?s true, then we?ve been in an economic recovery for more than three years. And the best growth we can manage that far out is under 2%?

So far, this has been the weakest recovery of any since World War II. And the fact that growth is this weak after more than three years out of a recession doesn?t bode well for the future. It seems the best we can expect is very slow growth, bordering on recession.

The devil is in the details

As disappointing as the growth rate is, there?s even more bad news in the driving forces behind the growth. The three drivers are increases in consumer spending, housing and federal government spending.

Consumer spending should be up?after all, this is a presidential election year, a time when people tend to be optimistic. Housing spending is up 14% and is no doubt being fueled by the lowest mortgage rates in history. But 3.something percent on fixed rate mortgage money should have us in a certified real estate boom. The fact that that isn?t happening is troubling.

And increased federal spending? When is federal spending ever down??? Federal spending is an intentional backroom decision, not a natural economic phenomenon. And who?d expect otherwise in an election year?

Meanwhile, the growth rate is being held down by two factors that are more indicative of what?s really happening in the economy: a decline in exports and flat business investment in equipment and software. Both are ominous indicators for the future.

And this is a presidential election year!

This is the part that?s most disturbing. This is a presidential election year and we?re experiencing anemic growth. In fact, this is our second year of low growth. If this is the best we can do in 2012, we might want to prepare for some rough sledding ahead.

What can we expect for 2013?

If President Obama is re-elected, we can expect more of the same?continued anemic growth. Considering the possibilities, that?s far from the worst of all outcomes. If Mitt Romney is president, we can expect some changes (though if I?m placing bets, I won?t expect anything dramatic or in any way resembling economic salvation).

But there are a few things we do know that may have a greater effect on the economy than the outcome of the election.

Major tax changes are in the pipeline. The so-called ?fiscal cliff? is expected to unfold on January 1. Three tax increases are in the works:

1. The social security payroll cut that lowered the employee portion of social security tax from 6.2% to 4.2% is expiring on December 31, 2012. That translates to a near across-the-board tax increase of 2%.
2. The Bush era long-term capital gains tax breaks will be expiring at the end of this year as well. Rates will increase from 0 and 15% to 10% and 20%.
3. A Medicare surtax of .9% (rising from 2.9% to 3.8%) on incomes over $200,000 (single) and $250,000 (joint) kicks in beginning January 1, 2013. This tax will be used to partially fund the higher cost of the unfolding health reform act (PPACA).

Congress and the White House could still reverse one or two (or all three) of these tax increases before year end. But if it?s decided that 2% economic growth is the new normal, and the economy no longer needs to be rescued from the edge of oblivion, the tax increases will stick.

International economic weakness. The economic situation outside the US is no better, and in some places it?s much worse. China and Japan are both slowing down, and Europe continues to wobble. Spain just reported that it?s unemployment rate just went above 25%–that?s comparable to the unemployment rate in the US in the depths of the Great Depression (Spanish unemployment hits new peak, CNN Money, October 26, 2012). This explains why exports are dropping.

Best strategy: remain in recession mode

If economic growth below 2% is the best we can do in the two years leading up to a presidential election, we?re better off if we personally remain in recession mode. Avoid unnecessary consumption. Stay away from new debt and payoff old debt. Stash as much money in your emergency fund as you can. Sharpen your job skills. Start a side business in case you need a storm cellar to jump into. Expand your network of personal and business contacts. Be prepared for the worst.

None of us can know if next year will bring on a new recession?but I wouldn?t bet against it.

Am I being too pessimistic here? Am I not being pessimistic enough? What do you see happening to the economy in 2013 and how should we prepare?