Just a reminder: Capital is sitting on the sidelines because of …

posted at 2:21 pm on June 4, 2012 by Ed Morrissey

Actually, this AP report might be out of date, and not just because it ran on Saturday, the slowest news day of the week.  Their lead paragraph states, “Business has picked up,” but that’s no longer true.  Business growth has declined since 2011Q4′s 3.0% annualized GDP growth rate, tumbling to 1.9% in Q1, with manufacturing hitting three-year lows in two of the three months.  But to the extent that business had grown, employment hadn’t followed.  Why?

The economy seems so gripped by uncertainties that many employers have decided to manage with the staff they have. They aren’t convinced their customer demand will keep growing. Or they worry that Europe’s festering debt crisis could infect the global economy. Or they aren’t sure what Congress will do, if anything, about taxes and spending in coming months.

All that helps explain why U.S. employers added just 69,000 jobs in May, the fewest in a year and the third straight month of weak job growth.

“If you’re anxious, you sit on your hands,” said Chad Moutray, chief economist at the National Association of Manufacturers. …

Companies also complain that changes in environmental regulations and business subsidies are too hard to predict and plan for.

Much of the problem stems from regulatory adventurism, and the ambiguous manner in which the regulatory state has expanded.  Businesses cannot plan for largely-unwritten regulations stemming from ObamaCare and Dodd-Frank, two bills which Democrats passed that provided a shell of authority for bureaucrats to issue massive amounts of regulation and rules.  No business can plan for growth without knowing the compliance costs for just the status quo, let alone any expansion.  The result is that businesses and investors are forced to shelter capital rather than put it to work until the ambiguities are resolved.

The AP analysis also relies heavily on reaction to “Taxmageddon,” the cliff approaching at the end of the year on tax rates and spending cuts at the federal level:

Jason Speer is nervously watching Congress and possible tax changes as Bush-era income tax cuts near expiration at year’s end. He’s a vice president of Quality Float Works of Schaumberg, Ill., which makes devices to monitor fluid levels in tanks.

Speer says he’d feel a lot better about hiring later this year if it weren’t for the uncertainty about federal taxes. Unable to anticipate his company’s costs, Speer says he can’t make decisions about growth and hiring.

“We don’t know if there’s something around the corner that’s going to hurt our business,” Speer says.

That’s one of the reasons why we’re heading into another Wreckovery Summer, but it’s hardly the only one.  After all, income tax hikes won’t impact income earned this year, and it would make sense to invest capital ahead of tax hikes in some cases (not all, especially for short-term income opportunities).  The sequestration cuts will impact defense contractors hard, but those effects will spill over to subcontractors and suppliers, as well as tertiary markets.  However, if the regulatory climate was reasonable and clear, investors would still look for non-defense opportunities for expansion to put capital to work, not to have it sitting on the sidelines and drawing a minimal amount of interest.

Over at The Fiscal Times, Suzanne McGee confirms that the “ugly” numbers from last week have capital investors looking for shelter from another Wreckovery Summer, although McGee puts more emphasis on the global slowdown:

The economic numbers released late last week were downright ugly. First-quarter GDP growth at 1.9 percent wasn’t quite as robust as everyone had assumed. Amere 69,000 jobs were created in May, the lowest level seen in the last year, and April’s job creation numbers were revised downward. The unemployment rate – which already understates the real level of unemployment by excluding those disappointed workers who are no longer searching for jobs – edged back up to 8.2 percent. And the weakness isn’t confined to one or two industries, but is seen across the board. Those people who still do have jobs are seeing their employers cut back on the number of hours they work – an early warning signal that those employers are worried about an actual or potential falloff in customer orders or demand.

Unsurprisingly, those unpleasant job numbers were the last straw for stock market investors, whose nerves were badly rattled throughout May by everything fromJPMorgan Chase’s (JPM) trading loss and the bungled Facebook (FB) IPO to the steady stream of bad news coming from Europe. The Dow Jones Industrial Average sank 275 points, or 2.22 percent, relinquishing what was left of its gains for the year. The index is now down 0.81 percent in 2012, while the S&P 500 remains up just 1.63 percent. The yield on 10-year Treasuries hit a record low below 1.5 percent. …

That may be an overly melodramatic view of the situation, but the truth is that we’re facing, for the first time, the downside of what it means to be part of a global economy. Up until now, it has been our own problems that have caused us to struggle economically and slip into recession – whether it’s irrational lending practices by banks or irrational exuberance with respect to fledgling dotcom companies’ growth prospects. We have tended to slip into recession first, and when we sneezed, the rest of the world came down with a cold or even pneumonia. Now, instead of the United States pulling the rest of the world into a recession, we are finding that we can’t immunize ourselves from problems in other parts of the world any more. We’re part of a global economy, and that global economy is struggling, too, perhaps even more than is the U.S. economy.

Take Brazil, for instance, which on Friday reported some very worrying economic numbers: The country’s GDP grew only 0.2 percent in the first quarter, not the 0.5 percent that economists had expected, despite a series of hefty interest rate cuts that began last summer. Industrial production there has stalled. India’s growth rate has been cut nearly in half as its manufacturing sector contracts. Even China is focused more on making sure its landing is a soft one that doesn’t ignite social and political strife than on fulfilling what some once imagined might be its role – to buoy the global economy when developed markets in North America and Europe stalled.

If the US wanted to take off the shackles, the easiest way to economic growth is to roll back the regulatory intrusions — perhaps especially on energy production — and demonstrate at least some progress on long-term fiscal and tax reform rather than another round of gimmickry.  So far, the Obama administration doesn’t even seem inclined to try that approach, and so we’ll wind up with our third consecutive lost spring and summer.


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