U.S. Economic Outlook Turns MIC Breakfast Sour


Very Slow Growth Expected In Foreseeable Future

INDIANAPOLIS, In.  (Feb.22)—  Looking for the Good, the Bad, and the Ugly of the U.S. economy this year? Well, we heard all about it during the Motorcycle Industry Council’s annual meeting at the Dealer Expo here.

Martin Regalia

The U.S. Chamber of Commerce’s chief economist, Martin Regalia, plopped the unpleasant news right in the middle our breakfast coffee and donuts in a most unappealing fashion. Unfortunately, the bad and the ugly outweighed the good by a wide margin.

Regalia saved his heaviest punches for President Obama’s new budget. But more about that later.

Here’s Regalia’s outlook, in a nutshell:

The Good: We’re coming out of the recession, although very slowly.

The Bad: We’re not growing fast enough to replace all the jobs we lost, among other things

The Ugly: We’re staggering under so much federal spending that we may never get the budget deficit under control, which causes a whole basketful of problems. Among them: we’re losing our independence to our foreign lenders.

If the big picture’s not bad enough, here are some of the really ugly details from Regalia.

The U.S. economy grew at about 2.2 % in the 3Q last year, jumped to 5.7% in the 4Q and should average about 3% this year. That 3% is a key number; that’s our long run potential. If we grow faster than that, we risk inflation, slower and we’re not going to have full employment. So, the good news is that the economy is growing and we’re climbing out of the recession.

Unfortunately, because the U.S. economy is driven by the consumer, who isn’t in a position to buy much, we’re not going to grow fast enough to rehire all of those people laid off during the recession for a long time. That’s due, in part, because we lost $14 trillion in household wealth as a result of  the drops in 401(k) plans and housing values. “We’re going to see more restrained spending,” says Regalia. “We’re not going to see consumers borrowing to maintain excessively high levels of spending. They’re trying to repair their (personal) balance sheets. And they can’t borrow, anyway.”

There will be some spending but it won’t be aggressive until we see stabilization in the housing market—stabilization in sales, in starts and in prices. Don’t look for that to happen any time soon. “It will be some time before appreciation in wealth in the housing market generates the job growth, income and wealth appreciation (we saw) prior to the downturn,” he said.

Consumer spending makes up 70% of our Gross Domestic Product (GDP), investment another 15%, and international trade, 15%. Investment isn’t going to grow because we have excess production capacity, and trade is about even.

“The combination of these factors gives us a GDP of about 3%,” says, Regalia, “but this doesn’t build a whole lot of momentum. This means unemployment will stay elevated.”

The labor side is where we really got clobbered, losing 8.4 million jobs in the downturn. Today, he says, we have more than 13 million persons, unemployed, under-employed or dropped out of the labor force. Regalia: “If we don’t grow a whole lot more than our potential, it could be six, seven, eight years before we get back to 4.7% unemployment (where we were at the beginning of the recession.)” Obama’s 10-year budget forecast doesn’t call for anything less than 5.7%, in the best case, he said.

We’re talking huge amounts of spending by the federal government here. Regalia describes Obama’s recent budget as “absolutely, jaw-dropping horrendous” and “absolutely unconscionable spending.” Spending is slated to hit $3.7 trillion this year, $3.8 trillion next year, and $5.7 trillion in 10 years. Worse than the spending is the deficit: $1.6 trillion this year and $1.3 next year, about 8% of our economy. We don’t have the revenue to match our huge spending appetite.

There are two real problems here: First, we can’t get our spending under control, and, second, we’re borrowing from other countries, so we’re selling off our independence. Spending: 60% of our budget is on auto pilot; we’re committed to paying for Social Security, Medicare and Medicaid. “The problem is you can’t cut this spending,” Regalia says. So, 40% of the budget is discretionary spending; but half of that is for defense, and you’re not going to cut spending when you have troops overseas. Finally, the non-defense spending is going up about 8%.

“In order to try and maintain some semblance of sanity,” says Regalia, “you have to have tax increases.”

The only time in recent history when we had our fiscal house in order was in the 1990s when we had a Republican Congress and a Democratic administration. We had spending gridlock, but productivity improvements meant that we were bringing in about $80 billion annually in tax revenue. Revenue increases without spending hikes translated into budget surpluses.

“The fact of the matter is that now gridlock and growth are not enough,” said Regalia. “And the reason that gridlock and growth are not enough is that we have let our spending programs get totally out of whack.”

The problem on the borrowing side is even worse, he says. At our current levels of borrowing, you increase federal expenses by $1 trillion every time you increase interest rates on federal paper by 1%.

“We have these huge debt levels,” argues Regalia, “and we borrow more and more money from abroad. In the best of times, they continue to lend to us at relatively low interest rates and the worst that happens is that we invest this money successfully and our wealth gets transferred to the people we borrow from. The worst, is that they stop lending to us at cheap rates.

“They’ve learned the joke. The joke is, you don’t slaughter the cow, you milk the cow. We’ve become addicted to foreign capital. We borrow more and more and more of it. We waste it and then when we have to service that debt, we transfer more and more of our wealth to foreigners. First it’s our surplus and then it’s our seed corn. When you transfer more and more of that abroad,  you become less competitive in the long run.”

The really ugly news, as Regalia told the MIC audience, is that we are dependent upon the Federal Reserve to get its banking policies correct at the same time the economy is growing too slowly to reduce unemployment to acceptable levels and we’re “woefully inundated by federal spending programs that will never get the long term budget deficit right.”

The Good, the Bad and the Ugly. JD

Contact me with news tips and story ideas at 952/893-6876 or joe@powersportsupdate.com. Follow me on Twitter
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2 Responses to “U.S. Economic Outlook Turns MIC Breakfast Sour”

  1. Carey Bohn Says:

    Scary stuff, Joe!

  2. Charles W Schaefer North Carolina Says:

    It is unfortunate that a heavily subsidized, greatly biased group, the US Chamber of Commerce, has given the Wall Street, Big Insurance, Multi National business mantra masquerading as an actual true picture of the multi faceted economic reasons for the current recession. Not my words; one need only view the US Chamber website, check its sponsors and contributors, and it becomes apparent whos words Mr Regalia is speaking. To equate government spending, government regulation and government services to your budget, my budget, and the budget of any corporation is naive at best and highly disingenuous at worst. One question: Where was Mr Regalia and the US Chamber of Commerce when unrealistic personal and vehicle loans were pushing 5 digit motorcycles out the door by a family of five with one low income breadwinner? What about a decade of silence when profit recommendations for the inevitable downturn appeared? These are the wailings of insincerity, and empty words that have never been true economic policy. Plain and simple; Mr Regalia is using centuries old rhetoric to encourage support for and paid membership in his self serving organization, the US Chamber.

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