Free Markets, Free People

Economy

How hungry are governments for tax revenue?

Hungry enough to tax minimum wage employees for their “free” (or reduced cost) restaurant meals in Michigan:

Although it may be “free,” that’s not stopping some legislators from attempting to tax it. State Rep. Mark Meadows, D-East Lansing, has introduced House Bill 6214, which would tax free meals employees get while working at restaurants and food establishments.

Can anyone think of a better example of a tax which would hit those that can afford it least? One of the few benefits of working what is usually a minimum wage job is the server or worker is allowed one free or reduced cost meal a day. When working for the wages the restaurant industry usually pays – especially in fast food establishments, that helps a bit.

Making them pay the sales tax on the meal probably won’t break them, but it is a direct tax on what Democrats always call “the working poor”. The party that contends they’re the champions of this class are taking a run at squeezing a few more pennies out of their pocket – at least in Michigan.

It also places another collection and book keeping demand on the business. That isn’t “free” either.

Michigan, of course, is a state in which government has essentially failed, is significantly in debt and is looking for any sort of revenue it can scare up.

What’s next, taxing the dead for the privilege of being buried in the state?

~McQ

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Just words

Not that I’m particularly upset by this (liberal certainly are), however, it again makes the case that this president should never be judged just by what he says (see below). He should always be judged by what he does and how it all turns out. For instance:

The White House is intervening at the last minute to come to the defense of multinational corporations in the unfolding conference committee negotiations over Wall Street reform.

A measure that had been generally agreed to by both the House and Senate, which would have affirmed the SEC’s authority to allow investors to have proxy access to the corporate decision-making process, was stripped by the Senate in conference committee votes on Wednesday and Thursday. Five sources with knowledge of the situation said the White House pushed for the measure to be stripped at the behest of the Business Roundtable. The sources — congressional aides as well as outside advocates — requested anonymity for fear of White House reprisal.

Tough talk, populist rhetoric (CEO’s get paid too much and we need to rein them in) and when it comes to actually doing so? Yeah, not so tough at all. Like I said, the outcome doesn’t bother me and, after publicly taking corporate CEOs to task, attempting to shame them and cut their pay, someone must have alerted Obama to the fact that they mostly paid the campaign freight during his run for the presidency.

Why do I say that? Well the “Business Roundtable”, which so vociferiously opposed this is a lobby of corporate CEOs. And the White House liason to that lobby is Valerie Jarrett.

The White House is now saying that the provision allowing investors proxy access which would allow them to have a say in CEO salaries was never something they explicitly backed.

“It was not part of our original financial reform proposals, and we have not taken a position explicitly. We have heard from and understand the various concerns on this critical corporate governance issue from multiple stakeholders including business, investors, labor and others. We are confident that the House and Senate conferees will come to a resolution and deliver a consensus view,” said the spokesperson.

Of course that, along with much of what they say, is not true. Huffington Post reminds us of two administration officials who took very explicit positions in support of the provison:

Deputy Secretary of the Treasury Neal Wolin addressed the provision. “The Senate bill will make clear that the SEC has unambiguous authority to issue rules permitting shareholder access to the proxy. We support that proposal. The SEC’s rulemaking process will define the precise parameters of proxy access,” he said. “But the principle is clear: long-term shareholders meeting reasonable ownership thresholds should have the ability to hold board members accountable by proposing alternatives and making their voices heard.”

Valerie Jarrett followed Wolin. “The Senate bill will make it clear that the SEC has unambiguous authority to issue rules permitting shareholders access to the proxy — essential, as I know you guys know,” she said. “We agree that corporate governance means more transparency, more responsibility, more accountability, and once again — I can’t say it too often — we stand firmly with you on that point.”

Any questions? Does this leave you with the impression that the administration never explicitly took a position on that provision? Are you still convinced Obama means what he says, or are you beginning to understand that he’s mostly show and not much “go”?

Oh, and yes, this would be called “crony capitalism” if you were wondering.

~McQ

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The muse is not with me today

I have no idea why, but I have little desire to write about politics today. Perhaps because it all seems so absurdly screwed up. Maybe because I think we may have crossed some imaginary line and I wasn’t aware of it and this is never going to find its way back to where our founders started it.

I mean, for goodness sake, you have book publishing companies putting warning labels on publications of the Constitution claiming it is a product of its time and doesn’t reflect present values. Really?

Maybe. I mean does anyone think the government we have today and its size, scope and depth of intrusion are anything like the “values” reflected by those who wrote the document? Does anyone think today’s “values” are better than those the publishing company thinks you should discuss with your kids?

There’s a certain level of frustration in tracking this, talking about it and seeing nothing change, and, in fact, watch everything go even further south.

And now we have this legislator for a president who just hasn’t the foggiest idea of what it means to be an executive and a leader. If you’ve been an observer of politics as long as I have, you can see the dark clouds forming on the horizon.

Internationally, it is the usual flash points, but you can see the trouble building and you get the idea that the troublemakers are sensing a weak horse here.

Domestically they’re already here I suppose. We just don’t know if it’s going to be a bad thunderstorm, a torrential rain storm or a freaking tornado. The other day I reported that well over half of all companies – and that’s the conservative number – will most likely be required by law to either change their insurance plans or drop them and pay a fine.

What kind of foolishness is that? Well it is exactly the kind of foolishness that poor legislation, rushed through to satisfy an agenda item instead of the people these politicians serve gets you. And now they’re catching flak and they don’t like it.

We had another melt down by a legislator last week. Bob Ethridge fires at a bunch of students asking him questions on the street. It is unseemly, ungentlemanly and frankly, unacceptable. These “public servants” display more of the arrogance of an aristocracy than they do the humbleness of someone serving the public interest.

And that’s across the board, local to federal, left and right.

There’s an anger festering the likes of which I’ve not seen in a long time. People are angry. Not just the activist right or even the activist left. Good old fly-over country middle America has had enough. Enough of being treated like they’re too dumb to understand. Enough of being characterized as racist or biggoted when they disagree about policy and politics. They are freaking tired of being ignored. The Tea Party movement is only one indicator of this deep resentment that is growing toward government in general and what it takes from them and what it delivers in return. I see the Tea Party as sort of like the statistic for talk radio. Only about 1% of those who listen call a talk radio show. My guess is only about 1% of those who feel like the Tea Partiers show up for their events.

I think this current administration is going to accomplish one thing, and that is bring this all to a head. The federal response to the oil spill has been pitiful. The President and Congress continually ignored the public and rammed this terrible mess of a health care bill through over their objections. The mismanagement of Fannie Mae and Freddie Mac may end up costing taxpayers as much as a trillion dollars and they’re focused on Wall Street. Congress won’t pass a budget until after the November election – even though it is their job – because it may adversely effect the chances of some members to win re-election.

Well, there’s a real easy way to solve that problem.

Politics has triumphed over good government. Agendas have replaced common sense. On both sides, party seems more important than “the people”. As Glenn Reynolds once described them, we’ve been inflicted with the worst political class in the history of this country. And it is painfully obvious.

Anyway, there’s about 700 words about why I’m not in the mood to write today. These thing come and go and I usually let them run their course. Heck, it may be over in a couple of hours as something jumps off the page at me. But until then, I think there’s plenty in this minor rant to talk about.

~McQ

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If ignorance is bliss, this is one happy White House

The cluelessness continues in the White House about the impact of the 6 month moratorium on drilling in the Gulf in waters over 500 feet. Taking the BP disaster as 100% certain without out such a moratorium, the administration has effectively stopped work on 33 deepwater exploration rigs in the Gulf . Energy Tomorrow gives a good round up of what the experts are saying about this policy:

•Adam Sieminski of Deutsche Bank predicted that U.S. oil production could fall by 160,000 barrels of oil per day by next year. (Financial Times)

•Bernstein Research said delays from the moratorium and rising costs stemming from new safety regulations are likely to raise the marginal cost of deepwater production by about 10 percent. (Financial Times)

•Paul Cheng of Barclays Capital warned that the higher costs could eliminate small independent companies who compete for drilling projects against the majors. (Financial Times) He also predicted an 11 percent drop in deepwater oil production. (Houston Chronicle)

•The Houston Chronicle reports that two large oil-services companies are relocating workers from the Gulf of Mexico to onshore North America drill sites and Brazil.

•The National Ocean Industries Association (NOIA) predicts that relocation is just part of the pain to be suffered by energy workers. Burt Adams, NOIA’s chairman, said in a statement, “the [president’s] order will be felt by the families of tens of thousands of offshore workers who will be unemployed.”

The American Petroleum Institute (API) estimates that the moratorium will cost us 130,000 barrels of oil a day by 2011 and up to 500,000 a day by 2013. And it could put up to 46,200 jobs at risk short-term and as many as 120,000 over the long term.

So the blanket moratorium has some real down-side to it. And it is important that our leaders understand that and are sensitive to it, especially when we’re in the economic doldrums right how, the oil spill has all but devastated fishing in the area and the resort towns who normally thrive in the summer are feeling the impact of the spill. Risking that many jobs with a blanket moratorium is just not good policy.

So how sensitive to all of this is the White House? Louisiana governor Bobby Jindal found out recently:

Jindal said he had a conference call with President Barack Obama’s senior adviser, Valerie Jarrett, and appealed to her to shorten the six-month moratorium, arguing that a half-year pause would force oil companies to move drilling operations overseas for years and that the federal government could easily impose new safety standards and monitoring in a shorter time frame.

“She asked again why the rigs simply wouldn’t come back after six months,” Jindal said. “What worries me is I fear they think these rigs can just flip a switch on and off.”

Gross ignorance is all that can be called. These rigs cost about $500,000 a day for oil companies. You do the math. Those owning the rigs probably wouldn’t mind sitting around, doing nothing and getting paid 90 million for each rig. But the oil companies are going to move them, while they have them under contract, to foreign leases they own in order to seek oil.

Exploration rigs have always been at a premium (which is why their daily rate is so high), and they’re constantly working somewhere – as long as the price of oil supports such exploration. But since half a year is the apparent non-negotiable moratorium, those rigs are going to pull up stakes and move to foreign leases – leaving the oil untapped, and providing jobs elsewhere. We end up with higher unemployment and more dependent on foreign oil than ever.

And our leaders haven’t a clue.

~McQ

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Spinning the unspinable – jobs report weak

President Obama is out telling workers at a trucking company in Hyattsville, Md that the new job numbers, 431,000 hired last month, shows the economy is “getting stronger by the day”.

Is it? It tells you something about credibility when you immediately question declarations like that, but that’s been the mantra for quite some time and it really hasn’t borne itself out as time progresses.

In this case 431,000 looks like a “good” number and seeing the unemployment rate drop from 9.9% to 9.7% would certainly seem to confirm that.

But the numbers really don’t support the spin. Of the 431,000 new jobs, 411,000 were temporary census jobs with the government that will go away at the end of the summer.

“The U.S. employment data was disappointing,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman, in a statement. Mr. Chandler noted that private-sector job creation, a crucial measure, reached only 41,000, compared with expectations for 180,000 and a three-month moving average of 155,600.

It only had a net gain of 20,000 private sector jobs, far below the 100,000 or so jobs necessary just to maintain the employment status quo.

As for the unemployment rate:

“The fact that the unemployment rate ticked down is not really good news,” he added, “as the decline in unemployment was not a function of more jobs but a reflection of people leaving the work force.”

The lack of private sector job growth is being hidden by massive hiring by government for the census.

“These new data do not present a picture of a healthy private-sector growth, and nothing closely resembling the job growth needed to dig us out of our very deep hole,” Lawrence Mishel, the president of the Economic Policy Institute, said in a statement.

He’s right – do the math. 8 million people have lost their private sector jobs since the recession began. As Mishel points out, these numbers don’t at all indicate an economy that is “getting stronger by the day”.

“You would need to be producing 150,000 to 200,000 jobs a month to be making a dent in this,” said Doug Roberts, chief investment strategist for Channel Capital Research.

When you begin seeing numbers like that – on a sustained basis – then you have some basis for saying the economy is “getting stronger by the day”.

Until then, it’s just so much spin.

~McQ

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Housing market sinks after tax credit ends

Not good news for a market that struggled even with the credit. The underlying weakness of the housing market again seems to be showing itself. And that’s not good news for the overall economy either. Diana Olick takes you through the numbers:

Everybody take a nice long look at today’s Pending Home Sales Index from the National Association of Realtors, because it’s just about the last positive picture we’re going to see for a while.

Those numbers she’s talking about show up in the May and June reports, but then she says, “look out”:

This index is based on contracts signed in August, and that’s how the credit was set up; you had to sign your contract by April 30th and close by June 30th in order to get your $8000 if you’re a first time buyer and $6500 if you’re a move up buyer.

And then came May, traditionally the height of the spring housing season.

Mortgage applications to purchase a home began to sink. Now, four weeks later, mortgage purchase applications are down nearly 40 percent from a month ago to their lowest level since April of 1997.

This is another indicator of a weak economy that still hasn’t yet sorted itself out yet. While the tax credits certainly helped sell some houses, it also hid that weakness that still exists. Look for the July report (Pending Home Sales Index) to again show we have a long way to go to full recovery.

~McQ

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Setting us up for more spending and much more debt

Yesterday the CBO director, Douglas Elmendorf, released a synopsis of its analysis of the Stimulus bill’s effect.  The findings are listed below:

  • Raised the level of real (inflation-adjusted) gross domestic product (GDP) by between 1.7 percent and 4.2 percent,
  • Lowered the unemployment rate by between 0.7 percentage points and 1.5 percentage points,
  • Increased the number of people employed by between 1.2 million and 2.8 million, and 
  • Increased the number of full-time-equivalent (FTE) jobs by 1.8 million to 4.1 million compared with what those amounts would have been otherwise. (Increases in FTE jobs include shifts from part-time to full-time work or overtime and are thus generally larger than increases in the number of employed workers.)

The effects of ARRA on output and employment are expected to increase further during calendar year 2010 but then diminish in 2011 and fade away by the end of 2012.

A few points – A) part of GDP calculation is government spending.  Since we know how poor the rest of the economy was doing at the time of this analysis, most of the “increase” in GDP is government spending, not productive increases.  B) the spread is monstrous and mostly meaningless – which is it 1.7 or 4.2?  C) unemployment reductions are a result of spending.  Further on in the report, it is claimed that 700,000 jobs were reported to have been created by the money.  Whether or not those jobs were permanent or temporary is not mentioned, nor whether they still exist.  Over 8 million are out of work.  D) also note the final bullet – FTE can be as little as overtime.

So, with all of that understood, let’s go to the bill itself, something I mentioned yesterday via Keith Hennessey – H.R. 4213, The American Jobs and Closing Tax Loopholes Act of 2010.  In reality, it is another deficit building “stimulus” bill.  It’s main components are:

The bill:

  • increases infrastructure spending by $26 B over ten years;
  • extends a raft of expiring tax provisions, mostly for one year
  • provides funding relief for certain employer pension plans;
  • raises a bunch of taxes, mostly on businesses and a certain kind of partnership income called “carried interest;”
  • extends unemployment insurance benefits, increasing federal spending by $47 B over the next two years;
  • increases Medicare payments for doctors through the end of 2013 for eighteen months at a $63 B cost;
  • increases health insurance subsidies for the unemployed (through “COBRA”) by $8 B over the next two years; and
  • increases federal Medicaid spending by $24 B for a six-month policy change.

And, as I mentioned yesterday, CBO scored this as a bill which thoroughly trashes PAYGO to the tune of an increase of $134 billion deficit.

But the CBO report at the top of this post is going to be used as the impetus and reason for going ahead with it because the Democrats are still firmly convinced to two things – you can spend your way out of economic trouble and per the CBO it’s working.  Again, note the final paragraph in Elmandorf’s analysis cite.  The supposed benefits of what has been spent to this point will “diminish in 2011 and fade away by the end of 2012.”

Enter HR 4213 and more deficit spending.

James Pethokoukis gives us 5 good reasons why “son of stimulus” is a very bad idea.  But what caught my eye was a quote by one of the economists on President Obama’s deficit panel said yesterday:

The gross U.S. debt is approaching a level equivalent to 90 percent of the country’s gross domestic product, the level at which growth has historically declined, said Carmen Reinhart, a University of Maryland economist. When gross debt hits 90 percent of GDP, Reinhart told the commission during a hearing in the Capitol, growth “deteriorates markedly.” Median growth rates fall by 1 percent, and average growth rates fall “considerably more,” she said.

Reinhart said the commission shouldn’t wait to put in place a plan to rein in deficits. “I have no positive news to give,” she said. “Fiscal austerity is something nobody wants, but it is a fact.

It may be a fact, but it not a fact that this President or the Democrats want to face.

Meanwhile, other forces are at work in the economy which could very negatively impact all of this:

The M3 figures – which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance – began shrinking last summer. The pace has since quickened.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever.

“It’s frightening,” said Professor Tim Congdon from International Monetary Research. “The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly,” he said.

Don’t tell that to the Dems or the administration – in their view, it is because we’re spending our rear ends of that we are recovering:

The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015.

Larry Summers, President Barack Obama’s top economic adviser, has asked Congress to “grit its teeth” and approve a fresh fiscal boost of $200bn to keep growth on track. “We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on,” he said.

It “grinds on” because of economic stupidity being demonstrated in the continuance of massive deficit spending, its effect on private markets and perpetually extended unemployment benefits that no one can afford.

Remember all the talk about the panic that led to TARP and how the cool, calm and collected Obama played the crisis just right? Yeah, well that was then and this is now:

David Rosenberg from Gluskin Sheff said the White House appears to have reversed course just weeks after Mr Obama vowed to rein in a budget deficit of $1.5 trillion (9.4pc of GDP) this year and set up a commission to target cuts. “You truly cannot make this stuff up. The US government is freaked out about the prospect of a double-dip,” he said.

And a spending panic is in the offing.

We keep hearing the likes of Paul Krugman tell us we’re not Greece. But when debt reaches 97% of GDP next year and 110% in 2015, I hope Krugman’s still around to tell us again why we’re not Greece, don’t you?

I wonder who will be there to bail us out?

~McQ

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Private pay shrinks, government payouts soar

Read this carefully:

Paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of this year, a USA TODAY analysis of government data finds.

At the same time, government-provided benefits — from Social Security, unemployment insurance, food stamps and other programs — rose to a record high during the first three months of 2010.

What is being said here is not that government provided benefits are now more than private paychecks.  Instead it is pointing to a trend brought on by the recession.  It gives a bit of lie to those who are claiming that all is well and we’re well on the road to recovery.  Those “government provided benefits” include unemployment benefits as well as other emergency benefits.

What does that mean?  Well it should be fairly obvious:

The trend is not sustainable, says economist Donald Grimes. Reason: The federal government depends on private wages to generate income taxes to pay for its ever-more-expensive programs. Government-generated income is taxed at lower rates or not at all, he says. “This is really important,” Grimes says.

Yes it really is. It is much like the problems we face with Social Security – we have too few workers paying for too many retirees. Well, this trend faces exactly the same sort of problem. We have too few taxpayers paying for too many unemployed. So that means going more into debt to pay extended benefits.

And that includes the states as well. To this point, 32 states have borrowed $37.8 billion from the federal government (and you know where the fed got the money) to pay unemployment benefits.

Here are the numbers:

• Private wages. A record-low 41.9% of the nation’s personal income came from private wages and salaries in the first quarter, down from 44.6% when the recession began in December 2007.

•Government benefits. Individuals got 17.9% of their income from government programs in the first quarter, up from 14.2% when the recession started. Programs for the elderly, the poor and the unemployed all grew in cost and importance. An additional 9.8% of personal income was paid as wages to government employees.

Now, having gone through all of that, what is the next sentence in the USA Today article?

The shift in income shows that the federal government’s stimulus efforts have been effective, says Paul Van de Water, an economist at the liberal Center on Budget and Policy Priorities.

“It’s the system working as it should,” Van de Water says. Government is stimulating growth and helping people in need, he says. As the economy recovers, private wages will rebound, he says.

I’m sorry, but what in the hell is this man talking about? Unless “stimulus” has been redefined since I woke up this morning, the “stimulus” he’s talking about hasn’t “stimulated” anything but unemployment benefit payments. How does one claim, with 9.9% unemployment (U6 at 17.1%) and private wages at their lowest point in “US history”, that the “stimulus” has worked?

I think, instead, this proves you can find an economist somewhere to say pretty much whatever you want, and this one wants to parrot the liberal line. My understanding is the purpose of the “stimulus” was to “stimulate” growth in the private sector. And that simply hasn’t happened.

One economist does seem to understand what this all means:

Economist David Henderson of the conservative Hoover Institution says a shift from private wages to government benefits saps the economy of dynamism. “People are paid for being rather than for producing,” he says.

And we know many of them are riding the payments out as long as they can, now having adapted their lifestyle to the benefits they receive.

Where I come from, that doesn’t count as “stimulus”. That counts as unsustainable economic trouble.

~McQ

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Union pension bailout introduced in Congress

Apparently deaf to the people and under the political thumb of unions, Sen. Bob Casey (D-PA) has introduced legislation that would provide another $165 billion in bailouts for troubled union pension funds. In essence, the bill would use the existing Pension Benefit Guarantee Corp behind union pensions as well at an initial cost of $165 billion. In reality it would be an open ended bailout.

Of course the problem with the union pension funds is the unions have managed them and, even in the good times, managed them poorly:

As FOX Business Network’s Gerri Willis reported Monday, these pensions are in bad shape; as of 2006, well before the market dropped and recession began, only 6% of these funds were doing well.

Of course, bailing out these pension funds is the wrong thing to do for any numbers of reasons. First, of course, is the government has no business taking from taxpayers to prop up entities which have mismanaged their assets. In a free society, the “freedom to fail” is as much a part of that society as the freedom to succeed. We shouldn’t be in the business of trying to prevent bad consequences that result from bad or poor behavior and management (although the precedent has been set with the auto bailouts).

Secondly, this is an internal union problem – not a problem for the taxpayers. Union members should be dealing with management that has so badly managed their retirement assets, not the rest of us. Where was the membership when it became clear, much earlier than now, that this sort of problem existed and was getting worse?

It isn’t clear that this legislation will get anywhere (it shouldn’t), but it speaks to a mindset existent among politicians that is the target of many voters this year. The Casey’s of the Congress are who need to go. And I’d feel the same way if it was a GOP legislator trying to save some corporation from the results of its poor decisions.

The idea of government, via the taxpayers, is there to backstop every downturn resulting from poor private decisions and management is an idea which we need to forever banish from out thinking.

As an aside, President Obama has declared there would be no more bailouts. But this is a union we’re talking about here. Let’s see if he sticks by his guns or whether we ought to give his declaration as much credence as we would if he said he was never going to use a teleprompter again.

~McQ

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The economy – what we’re facing right now

Despite all the assurances by politicians that “things are turning around” and that while “we still have a long way to go”, we’ve “survived the disaster”, I’m not at all sure that’s true.  Nor are a number of other people, to include Hale Stewart at FiveThirtyEight.  He does an extensive analysis of why unemployment had “unexpectedly” stalled out after showing signs of recovery.  He accompanies his analysis with a number of charts that demonstrate his point, but in essence his finding supports what we talked about last night on the podcast – the decline of the euro:

So, the central issue is a decreasing euro, which has led to an increasing dollar, which in turn has led to decreasing commodity prices. Recent reserve tightening issues in China have added downward pressure to commodity prices, which adds further evidence to the argument the US is facing an increased possibility of deflation.

That and a decrease leading economic indicators lead him to caution us that  we may see a lack of further economic growth in the next 3 – 6 months unless a few things happen:

1.) A decrease in initial unemployment claims below the 450,000 level. In addition, the economy needs to keep up its current pace of job creation. Last month we had a great employment report. That needs to be repeated in the next report.

2.) The euro needs to stabilize. The European Union has proposed a massive $1 trillion dollar package, which was announced several weeks ago. However, the euro has continued to drop since that announcement. Markets are now concerned that austerity programs will hurt overall economic growth.

3.) Commodity prices need to rebound. An across the board drop in commodity prices indicates the markets think decreased demand is an issue going forward. An increase in commodity prices will indicate demand is picking up.

Keep your eye on number 2, because if the euro doesn’t stabilize the chances of 1 and 3 happening aren’t good.  And that brings us to the second part of the story.  Europe.  It is there our fate lies at the moment.  And it is a fragile thing:

If the trouble starts — and it remains an “if” — the trigger may well be obscure to the concerns of most Americans: a missed budget projection by the Spanish government, the failure of Greece to hit a deficit-reduction target, a drop in Ireland’s economic output.

But the knife-edge psychology currently governing global markets has put the future of the U.S. economic recovery in the hands of politicians in an assortment of European capitals. If one or more fail to make the expected progress on cutting budgets, restructuring economies or boosting growth, it could drain confidence in a broad and unsettling way. Credit markets worldwide could lock up and throw the global economy back into recession.

For the average American, that seemingly distant sequence of events could translate into another hit on the 401(k) plan, a lost factory shift if exports to Europe decline and another shock to the banking system that might make it harder to borrow.

“If what happened in Greece were to happen in a large country, it could fundamentally mark our times,” Angelos Pangratis, head of the European Union delegation to the United States, said Friday after a panel discussion on the crisis in Greece sponsored by the Greater Washington Board of Trade.

If you’re in the US that is not something you want to read. We’re talking, of course, of the possibility of a double dip recession with the second recession most likely more devastating than the first.

The writers of the Washington Post piece cited above don’t feel the “worst-case scenario” is a high probability noting that European countries have pledged hundreds of billions of dollars to fix the economic problems. And they repeat the assurance that the US economy “has been strengthening through the year” to include adding jobs and with higher consumer spending and better industrial output.

But, as FiveThirtyEight notes, that’s not at all what the leading economic indicators promise will continue. Manufacturer’s orders and supplier deliveries have dropped. Commodity prices have continued to slide (indicating demand has dropped) and building permits are way down. None of those promise that the economy is strengthening.

The Post goes on to paint Europe’s travail is at least temporary good news for the US. But I don’t see it – certainly not in the numbers Stewart cites. In fact I see it as more whistling past the grave yard. As they mention in their opening paragraphs, this all depends on a number of things going right among a group of European nations at financial risk for not doing what they should have been doing for years. My confidence in the ability of “the experts” to successfully negotiate the financial and economic mine field – given their history – is not at all as great as the Post’s. And, I’d further note, that while everyone is assuring everyone else that they have this crisis in hand, they’re winging it, having never done or had to do anything like this to the scale they’re now involved. The law of unintended consequences is sitting in waiting salivating at the possibilities this crisis presents.

Bottom line – keep your eye on the Euro and hope like hell the Europeans can pull off what they have to do to keep us out of a double-dip recession.

~McQ

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