Business

Economy Is Weaker Than It Seems & Scary Facts On National Debt

FORECASTS & TRENDS E-LETTER

by Gary D. Halbert

November 8, 2016

  1. US Unemployment Rate Dropped to 4.9% in October
  2. Why the US Economy is Weaker Than It Looks
  3. The National Debt: Why No One is Talking About It

Overview

Before I get into today’s topics, I think I speak for most Americans when I say that we are relieved that this election will finally be over late tonight or early tomorrow. This has been the ugliest and most embarrassing election in most of our lifetimes.

[drizzle]Both candidates have the highest “unfavorable” ratings in history, and many Americans had to hold their noses to vote for either one of them. How this came to happen in 2016 will be the subject of countless debates in the months and years ahead, regardless of the outcome.

This election featuring two highly unpopular and ethically-challenged candidates has divided America as never before. And sadly, neither candidate has what it would take to unite the country. Likewise, neither candidate will have the overwhelming support of Congress to get things done going forward.

I predict it will be a long four years no matter who wins. I hope I am wrong but I doubt it.

As for today’s topics, we’ll start with a look at last Friday’s unemployment report for October, which was met with mixed reviews. Next, we’ll look at some new analysis following the better than expected 3Q GDP report which I wrote about last week. Unfortunately, the latest news suggests that the economy is not likely to repeat that performance in the 4Q or next year.

Regarding our ballooning national debt of $19.8 trillion, there is new analysis on what happens when interest rates go back up to normal levels in the next few years. I’ll offer some new statistics that may disturb you, but they are facts we all need to know. Let’s get started.

US Unemployment Rate Dropped to 4.9% in October

The Labor Department’s Bureau of Labor Statistics (BLS) reported on Friday that the official unemployment rate dropped to 4.9% last month from 5.0% in September. That was a little better than the pre-report consensus of 5.0% again.

The economy created 161,000 new jobs last month, down from the 170,000 expected and below the 181,000 monthly average over the last year. That was a little disappointing. The good news is that the BLS revised upward its jobs numbers for September and August by an additional 44,000 new positions created.

Wages in private sector jobs jumped 10 cents an hour to $25.92, up 2.8% (annual rate), the strongest 12-month gain since mid-2009. As you can see below, the trend in wage growth is healthy, but we’re still well below levels seen before the Great Recession.

National Debt

The Labor Force Participation Rate unexpectedly declined modestly in October, falling 0.1% to 62.8%. The participation rate remains the lowest since the mid-1970s.

Finally, the U-6 unemployment rate – which includes discouraged workers, part-time workers who would like a full-time job and “marginally-attached” workers (who can’t look for a job for one reason or another) – fell to 9.5% from 9.7% in September, an eight-year low.

All in all, the report was judged to be respectable as we head into the election.

Why the US Economy is Weaker Than It Looks

We were all pleasantly surprised when the Commerce Department reported at the end of October that the economy grew at a better-than-expected 2.9% in the third quarter, the strongest reading in two years. That was well ahead of the pre-report consensus of 2.5%.

And let’s not forget that the GDP report at the end of October was the “advance” estimate that will be revised (up or down) two more times at the end of this month and at the end of December.

National Debt

Unfortunately, new analysis I came across last week suggests – not necessarily that the 2.9% 3Q GDP was wrong as of yet – but more importantly, that it is not likely to continue in the 4Q or into 2017. Here is a summary of that analysis.

On the surface, the advance estimate of 2.9% growth in the 3Q was great news as compared to only 1.1% growth in the first half of this year. Most forecasters’ expectations have been high for a second-half bounce-back in the economy. And Wall Street has been ready for some good news, given the ongoing corporate earnings recession, fears over a Fed rate hike and frayed nerves heading into Election Day.

So why isn’t that headline GDP number as good as it looked? For one, consumers seem to be pulling back on spending, with consumption up just 2.1% in the 3Q, versus a 4.3% gain in the 2Q and less than the 2.6% that was expected. Remember that consumer spending makes up almost 70% of total GDP.

Also, the sudden boost in GDP growth was driven by an unusual surge in agricultural exports (mostly soybeans, actually) and inventory accumulation, which often turns out to be a temporary boost – especially if consumers are cautious heading into the holiday shopping season.

Outside of the increase in exports and inventories, which vary greatly from quarter to quarter, the other news for the economy was less encouraging. In addition to lower consumer spending, residential investment dropped 6.2% and equipment investment fell 2.7%.

Some forecasters believe that without the bump in exports and inventories, the economy expanded at an annual rate of only 1.4% in the 3Q. That’s a far cry from the 2.9% that the Commerce Department estimated.

But what does that mean for the economy going forward? This question has us turn our attention to the critical holiday shopping period which starts now. If the economy really expanded by 2.9% in the 3Q, which remains to be seen, that might suggest a strong holiday shopping season. Yet that’s not what most analysts expect.

Macroeconomic Advisers, a well-known economic forecaster, estimates that the economy will grow at an annualized rate of just 1.5% in the 4Q. If that is true, economic growth this year will fall short of 2% overall. If so, that will be the weakest annual GDP growth since 2013 at just 1.7%.

The bottom line based on this latest analysis is that the economy is not likely to reach 3% growth in the 4Q as some forecasters apparently still believe. If 4Q GDP is only around 1.5%, as noted just above, then the economic news will be very disappointing for the new president when the advance report comes out in late January.

The National Debt: Why No One is Talking About It

To my knowledge, neither Hillary Clinton nor Donald Trump has talked much about the national debt in their campaigns. Hillary has claimed that Trump’s economic plan would add $4-$5 trillion to the debt over the next 10 years, while promising that her plan wouldn’t add a penny to the debt. Both claims are bogus, for different reasons.

Our national debt stands at $19.8 trillion, up from $12.3 trillion when Obama took office. For discussion purposes today, let’s say the national debt is $20 trillion since it will be there before we know it.

As most of us know, the national debt is made up of apprx. $14 trillion of “debt held by the public” and apprx. $6 trillion of