Delos Smith is a Fordham University economics professor, president and chief economist for Delos Smith & Associates, and external affairs analyst for the American Bus Association. Previously, he was the senior business analyst with The Conference Board, which issues a monthly consumer confidence survey.
H.L.: What’s your take on the September jobs report, with 64,000 new private sector jobs – lots in services and retail – and the loss of 159,000 government jobs, including almost 60,000 local and state jobs?
D.S.: The only surprise was the state and local job loss number. That just shows you the challenges that so many state and local governments face. I was in the state of Washington last week looking at their infrastructure problems. There are great needs and there’s no money. Roads and bridges and public transportation initiatives are not going to be done, which means more traffic problems, among other negative effects.
Overall, we are having a slow period, and that period will continue until we start healing from all the problems from 2008. We have an economy that is frustrated, a lot of angry people, and a government that is trying desperately to do what it can do, but people do not think of the problems that occurred in 2008, and those were really desperate times. There is a time in which you just need to heal, and it takes time.
The Conference Board’s Consumer Confidence Index is around 25 now, and it’s been there for months with no movement. Normal is 90, and in good times it’s between 150 and 200. The consumer is extremely reluctant and is nursing wounds, and they’re just waiting.
You’re going to have very little job growth, which is not enough to start the economy in any way. It’s very hard to see when that will happen, but when it hits 90 the economy will be in much better shape with a much better Gross Domestic Product, and people will start to relax and being to spend money.
Another key indicator is consumer credit. It was down about $3.3 billion, and it has been down in 18 of the last 19 months, and it needs to turn around. When people heal, they will take a chance on credit, and companies will start hiring.
The three major markets – automobiles, housing, and retail sales – all show this reluctance and are very sluggish. The norm for automobiles was 16 million sales per month, and we’re at 11.8 million in September. At least it’s better from the bottom at 9.5 million. For existing and new homes, the inventories are still too high.
H.L.: To get the economy back to good growth, the Federal Reserve seems likely to again do some quantitative easing -- lowering interest rates -- after the November elections. – and many observers differ over whether it will have any effect. What do you think?
D.S.: It will have very little effect, which they admit. It’s popular to do something, but you can’t speed up the healing. We are underestimating the psychology of the trauma. You are easing in that the Fed will buy a lot of Treasury notes and bonds, which means the private world will have fewer bonds to buy, and hopefully private money will go to other investments, and that might spur the economy. Lending would become easier. But the Fed doesn’t have any more bullets in their guns any more, so they’re bringing out their bows and arrows. At least bows and arrows can kill.
H.L.: Some economists recommend another round of federal stimulus spending to get the economy back on its feet, although politically that appears dead in the water because of the implacable gridlock in Congress. But is that what’s needed?
D.S.: It certainly would be helpful, but it’s not going to happen because there’s so much disagreement. What’s needed is more infrastructure spending, which would bring a lot of people back to work. Infrastructure is in very poor condition in all areas, pipelines, roads, bridges, aviation, trains, electricity, but it will not happen because you don’t have the votes. Unfortunately there’s a terrible price to pay, as in the recent California gas explosion.
H.L.: How do you create jobs? Some say by more tax cuts or keeping all the Bush tax cuts or drastically cutting federal spending. What’s the answer?
D.S.: There is no easy answer. You can’t create jobs when consumer confidence is so low and people are still reducing consumer credit. But what will help in the long run is to reduce the federal deficit. But to get the budget under control, you have to have everything on the table to solve the challenge. You have to look at tax increases, which everyone hates, and you need to cut spending, and that has to be in entitlements like Social Security, Medicare, Medicaid, and defense. Politicians love to beat on non-discretionary spending, which means closing the Washington Monument, that kind of stuff, and waste, fraud, and abuse. When a politician says “waste, fraud, and abuse,” I laugh They’re not really hitting what they need to if they want to do this.
As for the Bush tax cuts which expire at the end of December, it’s not going to be helpful to increase taxes for everyone. This administration wants to keep the tax cuts for everyone making less than $250,000. We should eliminate the tax cuts for the wealthy, because there’s some money there. You make around $700 billion there, but the wealthy people and corporations have enormous political power, so good luck with getting that through. With non-discretionary spending, at best you can cut $100 billion. In reality it would be more like $20 billion or $30 billion.
But we are in a political stalemate, which just makes everything worse.
H.L.: The halt in foreclosures, due to fraudulent application processing by major banks, has put a cramp in the housing market. What do you see happening, and how will that affect the U.S. economy?
D.S.: It just creates a very nasty situation, where it’s very hard for the housing world to start healing. Stopping all foreclosures means no one knows what’s going to happen, which delays everything. The housing world is in chaos, and until we settle this, there will be no movement in the housing market, so it’s very negative, because the market is one of the most important sectors of the economy. Growth then depends on retail and automobile sales. This will keep the economy growing at a very slow pace and not enough to stimulate the system to create jobs.
It’s hard to know how quickly the banks can write up the proper papers and how much litigation will ensue, but there could be a lot of litigation. It’s all very unsettling, and that’s not good.
H.L.: Republicans are calling for cutting spending back to 2008 levels but not cutting Social Security, Medicare, and defense spending, which is almost all of our federal budget. Won’t that mean practically cutting all funds for the rest of the federal workforce as well as Congress, and is that platform a good one?
D.S.: It’s impossible. It’s trying to convince voters that they’re doing something, when they’re doing nothing.
H.L.: The Republicans also want to do away with the new package of financial reforms and regulation, the lack thereof which played a major role in the recent financial market collapse. Should we lighten up on financial regulation?
D.S.: It was the lack of regulation that created the problems. Can we manage to have financial reform, which is needed. We can’t allow the thing that happened in 2008 to occur again. We will get financial reform, because we have to get the world financial system under better control. . But it will come in little increments and will create a great deal of anger and frustrations. It will be effective to some extent, and it will probably will not be enough, because you will have a lot of very bright people trying to get around them. It’s nothing new. It’s always been that way. We’re not dealing with rational people. They want to look at things from a very narrow point of view. It’s created a business for me for many years.
H.L.: The stock market has been surging lately with expectations of good third-quarter earnings. What do you see for earnings and for stocks?
D.S.: There’s going to be a very narrow trading range indefinitely. I don’t see the Dow going much beyond 11,000. It will see if the market can maintain its growth, but there will be lots of selling pressure, because people will see it’s too high, and then they’ll build it back up again, depending on how we solve all of our challenges and how the healing goes.
Disclosure: No positions