Election Year Recession & Higher Unemployment Ahead

Over the last five months the strength of the United States economy has surprised on the up-side. America posted its strongest quarterly economic growth since the end of 2006 and U.S. corporate profits hit an all-time record high. But with the end of 100% “bonus depreciation, government spending shrinking for the first time since the 1940s and rising tax rates”; I project America is falling into a recession that will drive up unemployment to a new highs during the 2012 election.

Although the U.S. economy officially emerged from recession twenty-six months ago, most Americans report that they believe there has been little or no growth and 75% believe the nation is headed down the economic wrong track. The “Great Recession” of 2007 to 2009 was the longest since the Great Depression and was the first time U.S Gross Domestic Product actually fell in any year since 1948. Unemployment according to the Labor Department peaked in October 2009 at 10.1% and then declined to 9% last month. But this statistic does not include those unemployed who have been out of work for so long they no longer “participate” in registering for unemployment benefits. As shown below; labor force “participation” shrank by 2% since 2009. Add in these jobless and real unemployment rate is at a record 11% right now:

The stimulus that has recently been driving GDP growth is a provision contained in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This tax incentive allows businesses to book 100 percent “bonus depreciation” for any qualified capital expenditures purchased and taken delivery by December 31, 2011. This explains why the industrial production index has jumped back up to its average level for the last 40 years. The good news is businesses substantially increased capital investments in everything from $25,000 new Ford cars to $335 million Boeing 747 airplanes. The bad news is that business investments are being pulled forward into 2011 and 2012 suffer an off-setting fall in demand. Next year the U.S. economy will surprise on the down-side and unemployment will be on the upswing.

To fund spending increases on salary and pension benefits during the Great Recession; state and local governments raised taxes so much the effective percentage of all taxes paid by the average household in America jumped from 17.5% to 17.9%. This $247 billion tax increase more than off-set the stimulus effects of the last year’s federal payroll tax cut stimulus; but was not enough to prevent the lay-off of over 900,000 workers. But with voters in revolt and tax collection falling; state and local governments will cut spending this year for the first time since 1944.

Federal spending increased by 17% and the national debt ballooned by 55% since 2008. But voter rejection of deficit spending in 2010 and this year’s credit downgrade of the United States have forced Congress to cut federal spending for the first time since 1948. The recent deficit- reduction budget passed by Congress and signed by the President requires Congress to negotiate $1.5 billion of cuts, or the sequestration will require $1.2 trillion of cuts over the next 10 years. Federal Reserve Chairman Ben Bernanke stated in his last press conference: “I’m dissatisfied with the economy – unemployment is far too high”. He went on to state that “unemployment will remain above 7.8% through December 2013″. This is coded Fed speak for – watch out!

The last time on Election Day that America had declining government spending and rising taxes was 1948. That economy was growing by 2.6% and unemployment was only 3.8%. Twelve months later; growth had ground to a halt and unemployment more than doubled to 7.9%. I forecast America will soon be in recession and unemployment will rise into the 2012 election.

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