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All Hail the Janitor-in-Chief


What's the economic reality for the next president?

The US will go to the polls this November 4th to elect a Janitor-in-Chief.

I normally don't write about politics, but this election has large economic implications. Even though I'm a longtime Republican, I can still read polls. And it looks like Obama will be our next president.

First, let's look at the main problem facing the new president. George Bush came into office with the country already in recession. Over time, the economy recovered, albeit slowly. The recovery was fueled by mortgage equity withdrawals (MEWs). Over 2% to 3% of GDP growth in 2002-2006 was the result of rising housing prices - and consumers borrowing against their homes to spend on other things.

Let's review this chart:

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Click to enlarge.

The red bars show how the economy would look without that borrowing power. In this scenario, George Bush would most likely have been a one-term president. The economy would have been in a serious recession for 2 years, followed by a very slow recovery of less than 1% GDP growth in 2003-04. Unemployment would have been dismally high.

But in reality, the nation was growing at over 4%, and 9/11 was not so distant a memory. The focus was on the War on Terror. And Bush won a second term.

Today is different. The economy is in recession. Over 1 million jobs have been lost in the last 12 months. The preliminary number came out today for third-quarter GDP and it was down by 0.3%, the first negative quarter since the last recession. Because that number doesn't have much data from September, it's likely that future revisions will see the it worsen. 1% isn't out of the question.

The fourth quarter will again be negative, and even worse than the third quarter. Bush entered office with a recession that started during the waning months of the Clinton administration. He will leave his successor with a much deeper recession and a consumer on the ropes.

Let's review this critically important table from a few weeks ago. The above chart stopped at 2006. James Kennedy recently updated the data. Notice below how net MEWs have fallen precipitously in 2008, down 95% from three years ago. On this data alone, GDP should be off by 3% this year. No wonder we're in negative economic territory.

In 2005 there was almost $595 billion in mortgage extractions that went into some kind of consumer spending. Remember, according to the graph above, that translated into a 3% rise in GDP. In 2007, MEWs were down to $470 billion, for a boost of 2% to GDP.

Click to enlarge.

The second quarter of 2008 saw an anemic $9.5 billion. At that run rate, we could see a drop-off of well over 90% from 2005! Now, think what the second quarter would have been without the federal stimulus program of $150 billion. It might have looked and felt like this quarter!
No positions in stocks mentioned.

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