Economic Forces Affect Political Outcomes

The US economy and how it functions is truly a mystery to most people. For the most part it operates on faith. For politicians, it is generally taken as a granted. When a recession strikes, no one knows what to do.

The outcome of the 2020 Presidential Election hangs in the balance, and Trump has less than 6 quarters to turn things around in a major way, or Trump will become the first one-term President since G.W. Bush.

The data is very clear. It extends all the way back to the mid 70’s, and it is a nearly perfect indicator for POTUS election results. I have written about it in the past. It has not changed. The rules are rather simple.

Corporate Profits Are Mediocre

If corporate profits as reported by the Bureau of Economic Analysis is growing by more than 6%(more or less) year over year, then the party in the White House will maintain control of the White House. The ONLY exception to this rule since 1972 is Gerald Ford, who was tossed out of office because of the overwhelming desire for any new direction after Nixon’s resignation.

With that in mind, those that hold the office of POTUS really need focus on a few major things, and one of the most major things is the real health of the underlying economy.

Why corporate profits? It’s simple. Businesses are in business to grow profit. No one should run a business just to maintain the status quo. But watching the major financial networks, it becomes clear most are clueless to this rather simple truth.

But the networks seem to focus on two numbers that mask the real performance. The first is the top line, or sales. The second is the earnings per share. Both of these numbers are not worth 1/2 of what weighting analysts have placed upon them. Why?

Sales can rise 30% per year. But if you are not bringing any more profit per sale to the bottom line you are just working hard for the same result.

Earnings Per Share are Misleading

Earnings per share can make a company with less profit look like they are doing better than they really are. If a company’s earnings fall 3% but they buy back 4% of their shares, then EPS will rise. And this false signal seems to be embraced by analysts at every turn.

So why are we headed into a recession? The costs of doing business are rising, and rising fast, and there is nothing that will put the brakes on those pressures.

Back in 2008, the same two factors that accelerated the market collapse are happening once again. What are those two factors? Interest rates rising and minimum wages rising.

There has never been more debt being held by Americans in our history. And the increases in rates, while they appear small, relatively speaking, are really huge in their outcomes. Rates rising from 2 to 2.5% for instance, results in a whopping 25% increase in your interest costs. That is not insignificant.

Minimum Wages are Rising

Minimum wages increases, however, are going to push the economy over the edge. These increases are not happening because businesses have chosen to pay employees more because A) they are more productive and B) it is what is needed to get employees on the job. Rather it is the worst of reasons: despite the economic realities, government mandates it.

Minimum wage is increasing in 21 states in 2019. And by much more than what the rate of increase was back in 2008.

https://www.businessinsider.com/minimum-wage-2019-state-map-2018-12

Politicians never seem to grasp the affect of these mandatory wage increases on businesses. And the businesses they most affect are the ones with some of the lowest profit margins in our economy: Restaurants and retail sales are going to have to raise their prices to maintain their profit margins, despite the workers only producing as much as they did last year.

That of course, will inject just a bit more inflationary pressure into our economic system, which will put even more pressure on the Federal Reserve Bank to raise rates even higher.

We know that the the odds of states and cities reversing course and lowering the minimum wage is near zero. As for the Federal Reserve, who knows what they will do? They do not even know what they are doing today.

If Trump (and most of the Republicans) want to maintain the White House in 2020, they better start acting now to lower the costs of doing business in the United States. They will need to see this recession end quickly, which means it needs to be officially acknowledged sooner rather than later.

The summer of 2019 needs to be the low part for the economy. The rate of Federal Debt growth must be slowed dramatically. Home grown energy needs to be deregulated. The constant increase in local sales taxes fuel taxes and property taxes need to be reversed just to have a shot at this objective.

Otherwise, this recession is going to be far worse than 2008. And no business is actually prepared for that.

And I’d wager good money that no state or local governments are either.