Fiscal Cliff 2013: Why Political Compromise is Absolutely Necessary

Before I give the updated data for these economic indicators, here are a few things that you should consider. (1) Most of these indicators are reported on a monthly basis. (2) By considering data from the past and present, you should identify important trends that reveal opportunities and threats within the economy. (3) These indicators are derived from national data. When possible, I will report the regional data for the northeast, in particular southern Rhode Island. (4) Most of the trends that you see in the data will not warrant action, but that is not an excuse to neglect those trends. If for no other reason, it is important for small business owners to get in the habit of looking at data because doing so will make significant trends and opportunities easier to identify. As most of you know the success or failure of your enterprise hinges upon making accurate predictions for the future and acting decisively to capitalize on those predictions. I’m not going to discuss some of the important economic indicators in this post because they require a more detailed discussion than what is appropriate now. But I’ll address them in a later piece. With that said, here we go!

Manufacturers’ Shipments, Inventories, and Orders: New orders for manufactured goods in September increased $22.0 billion or 4.8% to $475.4 billion. Shipments increased $4.1 billion or 0.9% to $481.3 billion. Inventories, up three consecutive months, increased $3.7 billion or 0.6% from last month to $615.7 billion. Here’s a breakdown of those categories. Inventories are the “value of stocks of goods held for sale through retail stores. Inventory estimates represent the value, at cost, of the merchandise available for sale as of the last day of the report period” (U.S. Census Bureau, Bureau of Economic Analysis). Why does that matter? If we notice that firms are increasing inventories every month then we can guess that those businesses are doing so to meet higher future demand. If we look at inventories and business confidence together we often see a linear and positive relationship between the two and the strength of that relationship is strong. As confidence increases, businesses increase their inventory. New orders for manufactured goods and shipments tend to also move with the business cycle as supply chains respond to expected consumer demand.

Personal Income and Spending: Personal income increased $48.1 billion, or 0.4% in September. Disposable personal income (DPI) increased $43.0 billion, or 0.4% as well in the month of September, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $87.9 billion, or 0.8%. For August and September private wage and salary disbursements increased $4.1 billion and $19.5 billion, respectively. In total terms, from February to September 2012 personal income has increased every month. In the same time period, the per capita disposable personal income has increased from $37,591 in February to $38,107. That’s important. Unlike the top 1% of income earners, the middle class tends to spend a much higher percentage of their disposable income on consumer goods. In other words, they buy your products! Excluding June of 2012, consumers have increased their personal income expenditures on nondurable and durable goods, and services for the months of February through September. In September of 2012, $7,393.8 was spent on services, while $3,856.7 was spend on goods. Both of these figures represent a healthy trend of increased spending during a period of higher savings, wage growth, and falling unemployment. This is an encouraging sign but there is still weakness in the labor market and the recovery is still fragile.

Household Debt and Credit: Aggregate consumer debt fell by $53 billion in the second quarter. This trend has continued since the third quarter of 2008 when consumer debt was at its highest. Mortgage balances on consumer credit has fallen by 0.5% since the first quarter of 2012, a healthy sign that households are paying down the balances they owe on their homes. Household debt balances excluding mortgage debt increased by 0.4% in the second quarter to $2.6 trillion, driven by increases in auto and student loans. I will discuss  these two debt markets in the near future in order to highlight two worrying trends I see: firstly, the automobile as a liability, not an asset. Secondly I want to discuss what some people call the “higher education bubble.” Spoiler: it’s not a bubble, but families are spending far too much money on higher education for their children.

While most of the data above reveal encouraging trends in the consumer market it’s very important to understand that these trends are fragile. The real driving force behind the recovery in the U.S. is politics. Contrary to what many people think, the re-election of President Obama will have an insignificant effect upon the business climate. In fact, if Governor Romney had won the presidency we might have witnessed a scenario where a compromise on tax reform would be less likely to succeed than the likelihood of a similar comprise following Obama’s re-election. The reason? Well, there’s two that come to mind. First, the election of Romney would be interpreted by congressional Republicans as an emphatic and popular rejection of the progressive economic policies pursued by Obama in his first term. Second, and more important, confronted with a Republican President and a House of Representatives controlled by Republicans, Senate Democrats would react defensively. They would veto conservative initiatives in the same ideological fashion that was characteristic of  the Tea Party caucus of the Republican controlled House following the 2010 Congressional elections.

Alas, for all intents and purposes we find ourselves with a government that seems likely to reach a consensus between the three branches  and a Congress poised to pursue economic policies that are suited for today’s troubled finances and fragile recovery. Obama knows his administration needs to repair its relationship with the business community by being more tolerant of capitalism. His first administration was characterized by a tenuous relationship with business owners, but to a large degree that tension was a result of popular distrust of the business community following the financial meltdown of 2008. The Great Recession may have been caused by lenders and borrowers, but history will disproportionately blame the former for the most damaging recession in U.S. history other than the Great Depression. Time and again the fallout from these shocking and painful experiences leads to sweeping punishments for the supposed culprits. Even if we admit that a certain level of regulation was needed to reign in the irresponsible lending practices of banking institutions leading up to the recent recession, ultimately the strength of those regulations had to be arbitrary. Moreover, those regulations in particular, and popular anger in general, tend to overshoot their intended aims. The pendulum changes direction and swings too far in the opposite direction.

Obama knows that the best way to strengthen the recovery is to increase growth. Raising tax rates on the rich, closing loopholes in the tax code, and cutting spending taken together are superficial solutions at best and don’t achieve enough of a debt reduction anyways. Only economic growth can guarantee the medium-to-long-term financial rebalancing the U.S. needs. Obama is surrounding himself with advisers that advocate pro-growth policies. But make no mistake: the President and his constituents will not let the middle class fall victim to the same credit freeze and deteriorating job market we saw in 2008. Most importantly, Obama will do whatever it takes as a second-term president to fashion a favorable legacy for posterity. That means compromise. That means enabling the business community to expand. If need be, that means abandoning the radical wing of the Democratic caucus which was instrumental in his first election and re-election. This is a crucial point. Such is life in a republic; ask Caesar. But if the upcoming debt talks fail to meet expectations — and that is just as likely as success —  then I guarantee we will see a reversal of most, if not all, of the positive economic trends that have developed in the past six months. So pay close attention to this blog during the next couple of weeks because it will be your source of political and financial analysis.

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Cory Egan

Bachelors Degree in Political Science. Studying Economics and Analytics. Recently launched a small business, Chad Kennedy SBS.

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