Imagine an alternate reality where after the Titanic hit the iceberg the passengers stripped the captain of his powers and put someone else in charge. He brought in a new crew and they worked like mad and somehow prevented the ship from sinking. They even got the engines going and the ship heading in the right direction. As it became apparent that they were no longer in danger, passengers quickly forgot about their recent peril and gave the new captain no credit for saving the ship. Instead, egged on by members of the previous crew, they complained that their luggage was wet and the ship was behind schedule. This is the position in which President Obama now finds himself.
A recent poll found only 32% believed the country is headed in the right direction, and nearly twice as many said it was “on the wrong track.” Those numbers are far worse than when the same question was asked a year earlier. As investors we need to understand that this is a political phenomenon, and not a reflection of what is happening in the economy.
Economic growth
Quarterly change in GDP
When is the economy going to start growing? It already has. The key measure here is changes in gross domestic product, which is measured quarterly. This chart shows (in billions) the last eight quarters for which data is available. The first four bars represent the last year of the Bush presidency, with the economy shrinking at an alarming, and accelerating, rate. In January 2009 when Obama took over no one would have guessed a recovery like the one shown on the right side of the graph was possible. The economy still isn’t as stable as we’d like, but the ship is no longer sinking.
Employment
Monthly change in employment
Well and good, but why hasn’t the lousy employment situation improved? It has improved, far more and far faster than anyone could have hoped. Here’s a chart showing monthly changes in total nonfarm employment. It shows the last twelve months of the Bush administration, culminating with the longest bar in the middle of the chart, which was January 2009, when the economy lost 779,000 jobs. Since then — well, look at the chart. Job losses were rapidly reduced, and then we reached the breakeven point. We now have four consecutive months of positive growth in jobs. The Congressional Budget Office (a nonpartisan agency) finds that much of this improvement is attributable to Obama’s stimulus package. It’s impossible to pinpoint the precise effect, but CBO economists say (PDF) the increase in the number of people employed as a result of the legislation is between 1.2 million and 2.8 million. We’d all like to see even faster jobs growth, but it’s downright amazing that we’re in a position this good such a short time after staring into the abyss.
The deficit
Well then, what about the deficit? You’ve got me there. I’d like to have a chart showing the budget deficit disappearing, but that’s not about to happen. Yet there are reasons to be hopeful. The most important immediate task was to stop the economy’s downward spiral and get it moving forward again. The most important long-term task is to tackle healthcare costs. The new law is a major step in that direction, projected to reduce the deficit by more than a trillion dollars over the long term. And how’s this for a bonus: the original price tag on the bank bailout was something like $250 billion, but things have gone so much better than expected that the cost is now expected to be under $90 billion. When was the last time a government program ended up costing less than half the original estimate?
We aren’t out of the woods yet, and events outside our control (Europe, Korea, and any number of others) may cause the recovery to stumble. Whether we agree or disagree with Obama’s policies, though, we should recognize that the economy is clearly headed in the right direction.
Tags: economic stimulus, feature, Obama
