(By Costas Botelli) Did President Obama just make a fatal
mistake?
In an impromptu press conference this past Friday, in which he
pressed European leaders to take urgent measures to stem the
sovereign debt crisis, his remarks quickly turned to the health
of the US economy.
"The private sector is doing fine", proclaimed the
President as part of his assessment of the current state of the
economy.
Uttering those six little words was like throwing a piece a raw
meat to a pack of ravaging wolves. Literally within
minutes, Republican Presidential candidate Mitt Romney and a host
of Republican Congressional leaders pounced all over his
statement, accusing President Obama of being clearly out of touch
with the terrible state of the economy and struggling American
households.
Just hours later, the President was back on the air attempting to
clarify his earlier remarks.
"It's absolutely clear the economy is not doing fine,"
the President proclaimed with a more focused tone.
"...The economy is
not doing fine. There are too many people out of
work." Only this time, he did not mention the private
sector whatsoever.
Since Friday's press conference, Team Obama's damage control team
has been working overtime with all his best political spinsters
cleaning up the mess.
While the President apparently regrets making the statement, I
thought it would be compelling to explore how the private sector
is really doing and break it down, without having to worry about
polls or enraging the constituency.
Some of the material we're about to discuss can be very helpful
to you and your investment decisions as we head into the
Presidential election. In fact, following some of the data
points and measures could turn out to be a reliable and
predictive indicator of who wins in November.
Making the case for the political
gaffe
US Corporations have been raking in profits hand over fist since
the recession officially ended in 2009. In fact, the Bureau
of Economic Analysis recently released after-tax first quarter
profits that grew to an annualized rate of $1.7 trillion -- an
all time record high in earnings! That seems perfectly fine
to me.
US Corporations are flush with mountains of cash, with roughly $2
trillion sitting on non-financial company balance sheets.
Also, US companies currently have access to generational low
interest rates, making debt (re)financing and funding extremely
favorable thanks to the Fed's zero interest rate policy and
liquidity priming measures. That's a pretty fine position
to be in for the private sector.
So maybe the President's got it right.
Wrong! After such a severe recession, a sharp recovery is
expected. But with the size of this economy, it's still not
enough.
Past performance is not a guarantee of future
results
This is where the President's statement gets him in trouble in
today's economy. And it could very well put his
re-election efforts in jeopardy.
While the private sector has been doing fine, it's
definitely showing signs of losing serious momentum in all the
wrong places, with a troubling trend taking hold.
Private sector payroll, which has been the anchor in leading job
growth since the recession, is weakening since peaking in early
spring.
The President's argument after his private sector remarks alluded
to the fact that 4.3 million private jobs have been created in
the past 27 months, with over 800,000 created this year
alone. The problem is that we're still 14 million jobs
short of any type of a normalized labor market. And that's
not fine!
The backbone of American capitalism, small business, certainly
doesn't see things as "doing fine." The latest
results of the NFIB Small Business Optimism Index paint a gloomy
picture. The 94.4, while substantially off its credit
crisis lows, still indicates a level that's on par with a
recessionary environment.
Dig a little deeper and break down some of the sub-component
readings, and you'll find that expectations on future sales are
at a post recovery low. Also, many small businesses have
become increasingly reluctant to boost capital spending and
investment over the coming months.
The sub-component that shows small businesses as reluctant to
boost capital spending is actually felt on a grander scale as
generally measured by real business non residential fixed
investment. It's a wonky term, but extremely important
input to measuring the health of the economy by Gross Domestic
Product.
It's basically spending by businesses and corporations on
structures, plants and equipment that drive growth and
jobs. It's so important that it is a primary concern of Fed
Chairman Bernanke, who's pointed to the slowdown in private
sector capital spending at every opportunity lately.
That is precisely why he has explicitly pressed the President and
Congress to address the fiscal cliff as soon as possible.
At the end of this year, the Bush Tax cuts will expire, along
with other emergency stimulus measures that have been put in
place. And at the same time, a host of automatic spending
cuts will be triggered as per last year's agreement to raise the
national debt ceiling.
This uncertainty is a heavy overhang on the private sector, as
they are reluctant to increase the pace of hiring or invest until
both the business environment and fiscal policy become much
clearer.
I'm sure President Obama would be proud to say one day that
"theprivate sector is doing fine" ... when
there is actually truth behind that statement. But today,
those words are merely a political weapon for the opposing
political party.
A key step would be to come together with the Republican
Congressional leaders and agree on a grand fiscal plan to boost
confidence and clarity in the private sector.
President Obama should get this done as soon as possible,
preferably before the election in November. However,
Washington is a cutthroat town, and the keys to the White House
are the ultimate prize that the Republicans adamantly want to
take back... even if it means intentionally holding off on a deal
until after the election.
Over the next couple months, the Presidential election will
become a major focus for financial markets, and the trending
health of the private sector during this pre-election period will
most likely weigh heavily on the outcome.
Following some of these important indicators and data points on
the private sector may provide an advanced clue for who has the
edge heading into the election. And, dear reader, knowing
who may become President is a powerful piece of information that
we can all be fine with.