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Home Publications Blogs Beat the Press Post Chooses Debt Fixers Over Commerce Department Data

Post Chooses Debt Fixers Over Commerce Department Data

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Saturday, 15 December 2012 08:57

The Washington Post has been an unofficial partner in the corporate sponsored Campaign to Fix the Debt's efforts to cut Social Security and Medicare, devoting much of its news and opinion sections to advancing its agenda. This political position explains an article that examined the prospects for the U.S. economy after the budget impasse (a.k.a. the "fiscal cliff") is resolved. The piece relied extensively on assertions from David M. Cote, a prominent deficit hawk and the CEO of Honeywell.

The piece quotes Cote:

"There is the possibility of a robust economic recovery if we are smart here. . . . If all of a sudden we can demonstrate that we can govern ourselves, we could affect the world.”

In this context it probably would have been worth mentioning that the interest rate on long-term Treasury bonds is just 1.7 percent. This fact suggests that most actors in financial markets do not share Mr. Cote's concern about the ability of the United States to govern itself.

The piece relies further on Cote:

"He said the United States needs a tax-and-spending package of at least $4 trillion to be judged 'credible' by investors and trigger renewed growth. As head of Honeywell, he has frozen most hiring and capital investment because of uncertainty about the fiscal cliff — a strategy other corporate heads have followed as well to hedge against a new downturn."

There is an easy way to evaluate this assertion. If what Cote is saying is true then we should be seeing unusually low levels of investment right now. In fact data from the Commerce Department show that, as a share of GDP, investment in equipment and software is only slightly below its pre-recession level. This is especially impressive given that large sectors of the economy are still operating well below their capacity.

equip-software-inv-11-2012

Source: Bureau of Economic Analysis.

It is true that there has been some weakening of investment growth in the last half year or so, but even if investment returned to its growth rate in the first half of the year it would only have a modest impact on the pace of the recovery. In short, the data from the Commerce Department do not support what Mr. Cote is saying. If he in fact is delaying Honeywell investment because of uncertainty about the fiscal situation he is an exception among corporate decision makers.

This article also includes a bizarre comment in its discussion of the more rapid growth in the developing world in recent years, telling readers:

"But that could also sow the seeds of the next crisis if money floods into nations that are not equipped to manage it."

The statement is of course true, but it is not clear what countries have demonstrated an ability to manage large inflows of money. Clearly the United States does not fit the bill.

 Addendum:

A quick trip to Honeywell's website indicates that the company does not appear to be putting its expansion plans on hold as Mr. Cote claimed. In the last two weeks it announced $20 million in new contracts to produce simulations for industrial companies, a new contract with Boeing, and the purchase of another company for $600 million.

Comments (5)Add Comment
Tax Reform Act of 1986?
written by leo from chicago, December 15, 2012 11:20
Oh, Great One, any thoughts on the MSM's current love affair with the Tax Reform Act of 1986 -- you know, when both sides abandoned partisanship, joined hands, and put together ...

http://www.npr.org/2012/12/15/167321220/tax-deal-reached-in-86-so-why-not-now

Looks to me like the only accomplishment of that act was to bring down the top tax rate from 50% to 28% thus setting the scene for the worst income disparity we've seen since the 1920s.
He's not *exactly* wrong, with the first part anyways
written by Matt, December 15, 2012 11:22
"There is the possibility of a robust economic recovery if we are smart here. .?.?. If all of a sudden we can demonstrate that we can govern ourselves, we could affect the world.”


He's not exactly wrong here - but the "demonstration" is really going to be about whether we give in again to the budget arsonists or actually listen to the economists who've been shouting from the wings for years.

Of course then he demonstrates why it's up to Congress to show the world there are still grownups in charge someplace in the country - because most of the CEO class has drunk so much Pete Peterson kool-aid that they're utterly useless.
...
written by JSeydl, December 15, 2012 2:30
It's also worth mentioning that the latest factory orders report (http://www.census.gov/manufact.../s-i-o.pdf) was quite strong. That plus the stronger-than-expected Nov employment report really discredits the uncertainty scare story.
there are some concerns...
written by Brian Dell, December 15, 2012 5:29
Nonresidential fixed investment downshifted quarter over quarter in addition to equipment and software.

The November ISM was released December 3 and indicated contraction in manufacturing for the fourth time in the last six months. I consider this one of the best leading indicators and it's at its lowest level since July 2009.

To quote from the ISM survey:
"Comments from the panel this month generally indicate that the second half of the year continues to show a slowdown in demand; respondents also express concern over how and when the fiscal cliff issue will be resolved."
price signals may be distorted by Fed
written by Brian Dell, December 16, 2012 2:13
Bernanke recently announced that not only is the daily average of Fed buying of Freddie and Fannie (and some Ginnie) mortgage-backed securities in 2013 going to be equal to more than the entire amount produced by those agencies as a daily average, it's going to be equal to DOUBLE the agency product.

It should be obvious that this is going to drive up residential fixed investment in 2013. But that won't necessarily mean that housing is bouncing back in a sustainable way.

By the same token, the Fed'a buying in the Treasury market may be driving yields artificially low, such that the value of those yields as price signals is questionable.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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