Is America’s economy hostage to a 12-month election showdown standoff?

BY MORRIS R. BESCHLOSS
PVF & economic analyst emeritus

What was most dramatic about President Barack Obama’s rambling “Jobs Act” speech, the night before the first of the leading Republican candidates’ debates, is that it effectively marked the launching of a 14-month trek to the November 6, 2012, fateful presidential election.

Unfortunately, the victim of this escalating inter-party struggle between the Republican-dominated House of Representatives on the one hand and the Senate and the White House on the other is the languishing U.S. economy. This not only creates a standoff on legislative initiatives, but it means that the coming months will see precious few across-the-aisle agreements. This could shift an ailing economy into another recessionary trough, even without two consecutive quarters of negative gross domestic product growth.

It’s obvious that the “grand scheme” enunciated on Obama’s early September Joint Session of Congress address has no chance of being adopted in its entirety to solve a dormant economy and raise unacceptable employment levels.

The main stumbling block is not only the widening ideological gap between the two major parties in resolving the economic conundrum but also the growing overhang of probably the most contentious upcoming election in a century. What has gotten completely lost in the heated rhetoric unleashed by the president in both the Detroit Labor Day rally and to the gathering of the Congressional summit is that the health of the U.S. economy is becoming the underdog to election-year posturing.

Lost in this untimely shuffle are the thousands of independent businesses that are unanimous in having their demands met before they move extensively in the area of hiring, expansion and long-term growth. What I hear repeatedly from all levels of the industrial distribution channels are the following:

1. Revoke the burden of universal healthcare that is approaching avalanche proportions except for those favored companies blessed with federal exemptions.

2. Rein in the environmental extremism of the Environmental Protection Agency.

3. Freeze the implementation of the Dodd-Frank financial regulations.

4. Put a halt to further imposition of Sarbanes/Oxley and the tons of paperwork that the government concocted in the wake of the Enron fraud.

Fourteen months absence of resolute relief is long enough to force the U.S. economy to an even greater standstill, making the ultimate election results a pyrrhic victory, whoever wins.

Commercial sector rebound hits an air pocket

The overall building industry's commercial sector (multi-story apartment buildings, retail outlets, office space, institutional edifices, healthcare and retirement sub-sectors) seems to have stalled its recent two-year recovery, which bounced off the bottom in March 2009. This concern was magnified by Mort Zuckerman, high profile chairman of Boston Properties Inc., who evinced concern about a drop back to the level from which the current boomlet emanated after the economic financial implosion in September 2008.

Although the commercial property price index has regained most of its August 2007 peak, rebounding from a low of 62% up to 90% recently, the stalled U.S. economic recovery is beginning to again take its toll. This is best exemplified by comparative project sales from a year earlier that had reached maximum momentum late this past spring. Since then, a combination of deal cancellations, as well as complete lack of funding packages have cast a pall on what looked like a promising metropolitan comeback in New York City, Washington, D.C., and Chicago.

Much of the current stall is directly related to the dubious outlook of a U.S. economy caught in the web of a White House/Congressional gridlock that indicates little, if any, progress toward the resolution of unemployment or business expansion. This negative trend will be magnified by a reduction of discretionary spending, in the face of stagnating wage levels reflecting the availability of four to five bids for every available job opening.

Discouraging future commercial expenditures is the inevitable cutback in the headlong growth of government agencies at the federal, state and local levels. Ironically, this is expected to be more severe if the Republicans seize the reins of policy-making power at the November 6, 2012, general elections. If this happens, the expectations are for a severe cutback in required office space at all governmental levels. Also worrisome is the explosive growth of online expenditures in place of hands-on shopping.

The one bright light of the commercial upswing is the advent of apartment building, metropolitan, as well as suburban and rural, a transition that is fast developing, while new residential construction remains in the doldrums.

Middle class consumption squeezed, forcing retailers’ reorientation

The so-called middle class, the 40% of households with annual incomes between $50,000 and $140,000 a year, has been experiencing both declining earned income and a flattening in rising wages and salaries. The total net worth of this mainstay of America’s consumption bedrock has suffered an estimated decline of more than 25% since mid-2008, as both stock market investments and home prices have declined precipitously.

This pernicious development has caused a heretofore unfocused change in the spending habits of the American consumer. While discretionary spending by the middle class and those comprising the lower end of the U.S. consumer base have plummeted, the upper one percent, representing a disproportionate sector of revenue incomes, net worth and tax paying, seems to have generated a greater proportion of dollars spent in the face of a continuing fragile economy.

These developments have affected the retail sector in disparate ways. While provider Proctor and Gamble and retailers Costco and Wal-Mart have generally been hit by increasing lack of consumer patronage, those catering to the bulk of the aforementioned reduction of consumer spending have come forth with lower cost versions of key product offerings.

At the other end, Saks Fifth Avenue, Neiman Marcus and Tiffany are reporting brisk sales in the last quarter, as ultra-expensive home items, art and jewelry, etc., are increasingly profitable venues for companies catering to the upper crust, and are approaching pre-recession levels.

Most likely, this information will be exploited by partisans of class warfare as the political campaign keeps heating up, clouding the real issues in the upcoming elections.

Government agency restraint key to more cost-effective economic direction

One salutary development emerging from the interminable 20 scheduled Republican candidates’ debates is the evocation of ideas that are being floated to make forthcoming Executive and Congressional leadership less costly and more effective.

What has struck me most emphatically among the welter of ideas surfacing in the debates is the reining in of the explosive number of agencies and their preponderant power in forming the new restrictions being imposed on business and consumers alike. The cumulative cost impact and influence weighing on today’s governmental structure are the main reason that the comprehensive governmental octopus has doubled in its “crowding out” of federal government expenditures. As a percentage of gross domestic product, this has risen from 17% during the Kennedy years (1961 – 63) to the current administration’s 37%. The current White House has also used “executive decrees” in greater profusion than any of its predecessors.

The four agencies that have gained the most inflexible power to reshape the way America functions today are the Environmental Protection Agency, the Department of Education, the Department of Health and Human Services and the Department of Energy.

Although ostensibly serving at the pleasure of the president, these agencies have never assumed so much decision-making power. This has generally been condoned by President Barack Obama and has put its imprint on much of the counter-productive economic direction America is now experiencing:

1) Most dangerous is the Environmental Protection Agency, which seems blinded to the impact of its rigid climate control interpretations on America’s utilization of indigenous energy development.

2) The Department of Education has imposed its will on a national education process that was once the domain of local school boards and the states, in the province of tertiary education.

3) The Department of Health and Human Services has been given the charge of imposing an incredible costly unitary governmental health implementation structure on the United States, beginning in January 2014. This could become largely responsible for fiscal disaster, replicating the tribulation of the Eurozone.

4) The Department of Energy has become the source of imposing an impossible percentage of renewable energy sources (solar, wind, geothermal, ethanol) in an inconceivably short time period. This has not only stifled the realities of oil, natural gas, coal and even nuclear, for the rest of this century, but has already exposed the fraud of such preposterous expectations on the government’s forward planning.

The consummate impact of these major agencies alone, in cost of funding and their disastrous consequences, demands an unprecedented overhaul after the November 2012 general election.

Tyco’s three-way split dramatizes conglomerate breakup quickening

The recent announcement of major conglomerate Tyco International Ltd.’s breakup put a further exclamation mark on the quickening pace of corporations increasingly focusing on their core businesses. Emanating from a medium-sized fire protection specialist almost 50 years ago, Tyco evolved into a $120 billion entity, transcending a smorgasbord of industrials and service providers that bore little relationship to each other.

The new structure, some of which is expected to be spun off to stockholders, will consist of well-known alarm system ADT, pipe-valve-fittings, (my main area of industry expertise) and commercial security/fire systems.

This back-to-core approach has become almost torrential in the past two years, reflecting the realization that this makes more sense from the viewpoint of transparency, management and stock market focus. Such majors as ITT Corporation (originally International Telephone & Telegraph), oil giant Conoco Phillips, and Kraft Foods, among others, have already put this divestment strategy into play. Their subsequent financial market success is proving that identifiable parts are more valuable than the indescribable sum of the whole.

Although General Electric still stands as the prototype of the mega conglomerate, even that behemoth could eventually buckle under the pressure of stockholder valuation demands. This is reflected by GE’s depressed market value, primarily echoing the comparative value of its huge financial services division.

The original concept of conglomeration was spawned by Hal Geneen, a cost accountant-turned-CEO of ITT in the early 1960s. In his best-selling book, The Bottom Line, he espoused the concept that ultimate net profitability was the only measuring stick that mattered. He further emphasized that corporate super-size was the major dominator and belittled brand name preference, as well as once independent companies’ sector leadership.

Although acquisitions of free-standing manufacturers, primarily, became legion in the last half-century, spurred by the 1980s leveraged buyout mania, they reached their peak in the past decade. The current return to basic values, such as “specific business sector focus, decision-making leadership, brand name reliability and “Buy America,” have accelerated the ongoing divestiture trend.

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