Perception and Reality

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Yesterday I talked about how the two economies—the middle class consumer economy and the corporate economy—are really benefitting from the recovery that we’re apparently experiencing.

And that relates to the Federal Reserve’s latest views on the economy for the rest of the year. Bernanke now sees a GDP growth rate of 2.4%-2.9% for 2012.

This is higher than January estimates of 2.2%-2.7%.

So a higher growth rate means a better recovery, right?

Yes it does, but with some footnotes added, an asterisk, and maybe a disclaimer in some very small writing.

Why?

Because recovery and the perception of same are actually not the same. And that's a big problem for somebody...

The big deal with any recovery is how quick it is and how broad it is.

As I mentioned in yesterday’s Gorrie Details, the middle class has yet to really benefit from the recovery because the stimulus funding has largely failed to trickle down to the consumer economy.

And to be honest, this recovery is one of the weakest in history…

Typical post-recession recoveries average 4.5% growth in GDP. 2.7% is nowhere near that level…

But it is also true the the financial crisis was the worst in 80 years.

Yet so far, the recovery is nowhere near to being broad or deep enough to lift the economy out of its mire.

This reality is reflected in the state of the middle class economy…

The middle class is still having a tough time remaining middle class.

Housing has yet to recover—the big factor in any recovery…

Gas prices still dog the working Americans and threaten consumer confidence…

And falling incomes are still a reality with too many.

Add to that 8+% unemployment and the recovery that the Fed is talking up loses its luster.

And unfortunately for the Obama administration, the question of how Americans are faring today versus 4 years ago is the toughest one to address.

But lest you think it’s only the middle class that feels wary of the direction of the economy, don’t.

I had an insightful conversation with George Ross yesterday…

You know George as Donald Trump’s right hand man and judge on Trump’s Apprentice TV show…

Now George is a very successful businessman in his own right—He’s definitely a member of the so-called 1% of Americans. Heck, he even voted for Obama…

But even George and many of his colleagues and friends see the recovery for what it is…the weak and uncertain result of a weak and uncertain administration. Their confidence in the administration to lead the country back into prosperity is all but gone.

The problem, as George sees it—as I do, by the way--is that the administration’s policies are punishing business, not promoting it. There are too few incentives—tax or regulatory--for the private sector to create jobs. Too much focus is on top down stimulus and EPA compliance…

And not enough on creating a positive business climate. Without small businesses, George reminded me, there is no recovery.

I couldn’t agree more.

In fact, is it a coincidence that small businesses are where 65-70% of the jobs are in this country; and that the consumer economy is also about the same percentage?

Small business is the economic expression of a large part of the middle class.

George’s point is right on. The fact is that this recovery is weak because the small business climate is poor. When small businesses are not being created or are not thriving, consumption falls for a large chunk of the consumer economy.

George’s conclusion about this administration’s policies is that they haven’t worked and really won’t work.

It’s an insightful take from a former Obama supporter, especially when compared to Fed chief Bernanke’s recent cheery pronouncement that “things are about to get a whole lot better.”

The idea is that more stimulus money will soon be on its way. But as we’ve said before, stimulus doesn’t—or hasn’t yet—really penetrated the heart of the economy, which is the middle class. It will surely help keep the stock market high, and may even send it to record highs…

But its benefit will largely bypass the middle class…unless those getting the stimulus are compelled to lend it and spend it on the middle class via business loans, mortgage loans, and hiring workers.

I’m not in favor of this, either, because it relies on phantom money, but there may well be some short-term gains in employment and consumption.

But, this might be effective just in time for the November national elections.

Would the Fed’s latest stimulus be blatant ploy to gain votes for Obama?

Probably. But the bigger picture is the long-term damage it will do to the economy.

As you may know, the Eurozone and the UK are sliding back into recession as austerity measures cut into their economies.

The irony is that even with stimulus and without austerity, the US may well slide back into recession despite Bernanke’s sunny outlook.

Why would this be the case?

Simple; the signs of middle class recovery are not showing up as of yet (see above), despite the all that has been done the past 3 1/2 years…

What’s going to change for the middle class with more of the same?

And those are…The Gorrie Details.

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