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Comments on Mr. Marsden in The Wall Street Journal

Wed, Sep 3 2008, 21:32 GMT
by Asha Bangalore

Northern Trust

Comments on Mr. Marsden in The Wall Street Journal

Today’s Wall Street Journal has a story about the performance of the economy under the current President Bush (Bush Has a Good Economic Record - WSJ.com) by Keith Marsden. Mr. Marsden’s analysis is incomplete, at best. At the outset, I would like to note that the following is a non-partisan analysis of economic data.

Marsden notes that “President Bush will leave to his successor an economy 19% larger than the one he inherited from President Clinton. This U.S. expansion compares with 14% by France, 13% by Japan and just 8% by Italy and Germany over the same period.” Mr. Marsden should have only plugged the same formulas for the period 1993-2000, the eight years of the previous administration, he would have found that the U.S. economy grew by 25.7% compared with 15.3% by France, 4.2% by Japan (1994-2000), 11.8% by Germany and 11.3% by Italy. In other words, the U.S. economy’s performance has surpassed its peers by a noticeable margin in both periods, but with a stronger performance recorded during 1993-2000.

Unemployment rate: “The U.S. unemployment rate averaged 4.7% from 2001-2007. This compares with a 5.2% average rate during President Clinton’s term of office.” In all fairness, President Bush’s term ends in 2008, if you consider the average unemployment rate from 2001-July 2008, it is also 5.2%, with a near certainty of the average reaching a higher jobless rate when the remaining five months of data are included after the completion of 2008. In December 2000, the unemployment rate was 3.9% down from 7.3% in January 1993. By contrast, the unemployment rate in July 2008 was 5.7%, with most projections showing a higher jobless rate by the end of 2008, which is noticeably above the 4.2% unemployment rate in January 2001 (see charts 3 and 5). The Blue Chip consensus average of unemployment rate for the fourth quarter of 2008 is 5.9%.

Debt interest payments: “…the interest cost of servicing general government debt in the U.S. has averaged 2.0% of GDP annually from 2001-2008 compared with 2.7% in the euro zone. It averaged 3.2% annually when President Clinton was in office.” The federal budget surplus of 1998-2001 receives no mention.

Federal debt interest payments are a small part of total outlays of the federal government. The median of interest outlays as a percent of net outlays during 1940-1992 was 7.3%. As shown in chart 2, federal outlays as a percentage of GDP declined from 21.4% in 1993 to 18.4% in 2000. Federal outlays as a percentage of GDP have risen to 20.7% in 2008 from 18.5% in 2001, compared with a 19.8% average during 1950-1992.

Using the Misery Index (sum of inflation and unemployment rate), the comparison of the current President Bush’s term with the previous eight years is indicative of the shortcoming’s of the current expansion. The Misery Index fell to 7.3% in December 2000 from 10.6% in January 1993 (see chart 3). In July 2008, the Misery Index was 11.3% up from 7.9% in January 2001. Of course, a decline in the Misery Index is the preferred route.

It is widely known that growth of GDP and employment in the current expansion in the U.S., which began in November 2001, ranks the lowest in the post-war period (see charts 4 and 5). Charts 4 and 5 are index charts where the value of the economic variable (real GDP, employment) prior and after the trough are based on the value in the trough set equal to 100. For example, in chart 4, the value of real GDP in 2001:Q4 (the end of the recession or trough) is set to 100. In 2008:Q2, the index value is 118.5, which implies that GDP grew 18.5% from 2001:Q4. From charts 4 and 5 we can see that the current economic expansion, which commenced in the fourth quarter of 2001, is sub-par compared with the long expansions of the 1960s, 1980s and 1990s. In conclusion, the performance of the economy in the eight years ended 2008 pales in comparison to prior expansions of the U.S. economy.

Auto Sales Regain Momentum in August

Sales of autos rose slightly to an annual rate of 13.71 million units in August vs. 12.55 million in July, which translates to an average of 13.17 million units during the July-August period. The gains in auto sales could be from large incentives for 2008 models before the introduction of 2009 models. September auto sales will be necessary to gauge if this was a temporary event. In the second quarter, autos sold at an annual rate of 14.15 million units. Based on this information, we can say that auto sales have to advance by a large measure in September to match the second quarter average, at the least. If inflation adjusted consumer spending has to reverse a 0.4% drop in July and make a positive contribution to real GDP growth in the third quarter, we would need a robust turnaround in non-auto retail sales during August and September.

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Published on  Wed, Sep 3 2008, 21:35 GMT