5 Reasons Why the U.S. Economy Isn’t Shifting into High Gear

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GDP growth slipped into the negative last quarter and has been below normal for decades. Image by U.S. Department of Commerce

The Commerce Department released its final revised GDP report for the first quarter of this year. With the news, the outlook for the already-weak U.S. economy took yet another hit.

Initially reported as a slim .2% increase (annualized), the next estimate plunged the growth rate into the negative, all the way down to -.7%. The final tally “improved” to -.2%, meaning that the economy shrunk for the second time in five quarters and for the third time since the recovery began in June, 2009.

Post-Recession Economic Growth

If post-Great Recession growth had been strong, a few quarterly negative numbers would be dismissed as mere speed bumps. After all, two of the three negative showings occurred during the past two first quarters, and both followed particularly cold winters that suppressed consumer spending.

And yet, year-over-year growth has been trending downward since the late 1990s. After posting a string of quarters with annualized increases between 2.7% and 7.2% from  mid-1996 until early 2000,  growth has slowed dramatically over the last 15 years. Worse still, GDP growth has been weak even without considering the two recessions (2001-02 and 2007-09) that occurred during the period.

Although the party not in power predictably blames the other, the reality is that neither has been able to clear the fog that seems to hang over the economy. What’s going on?

Income Inequality

Income inequality is a serious problem for the economy. According to a study released by the Federal Reserve in 2013, the top 10% of income earners control nearly 75% of overall wealth.

How is this a problem?

Generally speaking, those at the very top do not purchase more toasters, lawnmowers or groceries. Instead, they invest their excess dollars to create even more wealth. Although this phenomenon has helped boost the stock market to record highs, it has served as a drag on economic growth, as those in the middle — people most likely to spend — are feeling the squeeze.

The Strong Dollar Is Widening the Balance of Trade

As the economy has become globalized, there are more and more opportunities for companies to market their products around the world. Of course, that’s also true for foreign competitors selling into U.S. markets.

According to Investopedia, the balance of trade is defined as follows:

The difference between a country’s imports and its exports. Balance of trade is the largest component of a country’s balance of payments. Debit items include imports, foreign aid, domestic spending abroad and domestic investments abroad. Credit items include exports, foreign spending in the domestic economy and foreign investments in the domestic economy. A country has a trade deficit if it imports more than it exports; the opposite scenario is a trade surplus.

After hovering slightly into the negative for years, the trade gap has widened considerably since the late 1990s, and is now three times worse than it was back then. As the trade gap widens, U.S. companies are negatively impacted, as dollars flow out of the country to foreign competitors.

Currency manipulation by other countries is exacting damage as well. According to the Economic Policy Institute, foreign currency manipulations slice between 2.0% and 4.9% off GDP totals. With annual growth in the 2% range now, the impact is clear.

Personal Income Growth Has Stalled

After growing throughout the 1990s, real median income (adjusted for inflation) has fallen since 2000.

Real median household income has fallen since 2000. Credit: Federal Reserve Bank of St. Louis.

Consumer spending accounts for the majority of economic activity in the United States. With purchasing power down, less discretionary income is available to spend on goods and services.

Interest on the National Debt

As the national debt continues to grow, so does the interest paid to the bondholders that financed the debt. That phenomenon is crowding out federal expenditures that could otherwise be spent in ways more conducive to stimulating GDP.

Discretionary federal spending has been trending lower, while at the same time the interest paid on the national debt has been increasing. In 2013, net interest expenditures were 7% of the federal budget — and rising. That percentage is bound to go higher when interest rates start upward again.

Public Opinion of the Economy Remains Low

As I wrote last month, Gallup’s Economic Confidence Index is in negative territory, and has been for years.

One month ago, the percentage of Americans who said economic conditions were excellent or good was just 23%, versus 29% who considered the economy poor. 42% thought things were getting better, and 53% felt things were getting worse. The average of the two sets of data is -9 (rounded).

When people believe the economy isn’t doing well, they defer big-ticket acquisitions and spend less money.

The U.S. Economy: Summing it Up

In short, the above five factors are wreaking havoc on the economy. The problems transcend political parties and it’s likely that growth will remain tepid until they are addressed in a serious, concerted manner.

Can the politicians put aside the finger-pointing and specious reasoning long enough to deal with the real underlying problems that are hampering growth? Based on the evidence, it seems doubtful. As Muhammad Iqbal once said, “Nations are born in the hearts of poets, they prosper and die in the hands of politicians.”

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