Why the Dog Won’t Hunt

President Obama’s fiscal stimulus gave the U.S. economy a temporary adrenalin jolt that began to wear off in April, the most recent data suggest.

Today’s news that weekly employment claims bounced up to 472,000—bringing the four-week average up to 463,500—confirms that the economy is shedding rather than adding jobs. The May payrolls report showed that the private sector added barely 30,000 jobs, while almost two-thirds of the reported 300,000 increase in April payrolls was due to “benchmark revision” by the Bureau of Labor Statistics. 411,000 of the 430,000 new jobs reported for May were temporary Census hiring. The BLS numbers, moreover, are heavily slanted to the upside by “benchmark revisions” based on supposed hiring by new businesses that the BLS guesses (but does not know) took on new workers. The New York Post ‘s John Crudele called this a ” boom in the fake jobs market .”

The latest data all suggest that the economic recovery is faltering:

1) Housing starts fell by 10 percent  in May, and single-family home starts fell by the biggest margin since 1991;
2) Retail sales in May fell by 1.2 percent, the first decline since last September;
3) Government loan-modification programs have postponed, but not prevented, distress sales of foreclosed homes. Because distressed sales have fallen as a percentage of total home sales, average home prices have picked up slightly—but the backlog of future distressed sales will pull the average price down later this year.

America has a creative-destruction economy in which the jobs lost to big corporations are lost forever, while startups create entirely new jobs. This time around we have the destruction but not the creation. Venture capital remains dead in the water; despite the surge in stock prices during the first quarter, venture capital investments fell by 9 percent from the extremely low level of the fourth quarter of 2009. And according to Discover Small Business Watch, 51 percent of small business owners polled in May thought the economy was getting worse, against only 35 percent who saw improvement.

The huge fiscal deficit has sucked all the economy’s financial resources as well as all the banking system’s available balance sheet into the US Treasury. America is running a deficit at around 11 percent of GDP with a personal savings rate of less than 3%. That can’t continue. During the next ten years the proportion of Americans above retirement age will rise form 19 percent to 25 percent, the biggest retirement wave in history. Prospective retirees have already suffered a $9 trillion reduction in their net worth due to the home price crash, and have to save to compensate. This constitutes a vicious headwind that will suppress consumer spending and employment. This is not so much a business cycle as an inflection point in the life-cycle of Americans.

The administration’s prospects for the November mid-term elections look grim. But the Republicans will have to address the long-term problems in economic policy before long. The country requires a radical shift out of consumption into savings and risk-taking, as well as a tax system that fosters rather than discourages family formation.