Three Reasons Why the U.S. Economy Continues to Sputter

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Unemployment is down – so why is the economy still struggling? Image courtesy of the White House

The more things change, the more they stay the same — Alphonse Karr

If you lived in a cave somewhere and managed somehow to only pay attention to the skyrocketing U.S. stock markets (forgetting the fact that caves generally don’t have Wi-Fi access), you might think the economy was booming.

In fact, 2014 ushered in a consensus opinion shared by many economists that the pace of the nation’s Gross Domestic Product — the total value of all goods and services produced — was poised to grow at an accelerated rate over the next several years.

The 2014 Economy’s Positive News

And why not? Interest rates were at near-record lows, spurring borrowing and helping to boost consumer spending. Other positive news included the following:

  • Overall consumer debt was 11% below its peak in Q3 of 2008.
  • Loan delinquency rates were down.
  • Foreclosures were at their lowest levels since the end of 2005.
  • Housing prices increased 12% in 2013.
  • Auto loans were at their highest levels since 2007.
  • Unemployment was below 7.0% (6.7%) for the first time since November, 2008.

Despite these welcome signs of renewal, the performance of the economy has been anything but impressive. In fact, the first quarter saw GDP decrease by an annualized rate of -2.9%, the worst showing since the end of the Great Recession. Why is economic growth not reflecting the recent good news? The following are three contributing factors:

U.S. Employment Is in Transition

Several vectors have changed the face of employment in the United States.

Although the Obama administration has trumpeted the news that the nation has regained the total number of jobs the economy lost during the Great Recession, noteworthy in that fact is that the population has increased by over 15 million people and the labor participation rate is the lowest it’s been since the Carter administration. The official unemployment rate is still 6.1% — but that figure does not include discouraged workers or those who are underemployed.

Secondly, despite recent gains, total aggregate manufacturing jobs have taken a large hit since peaking at about 14.5 million in 2004. The figure now stands at just over 12 million, with the losses having largely been replaced by lower-paying service industry positions.

Third, the Internet economy continues to transform employment in the United States. Brick and mortar retailers such as Radio Shack, J.C. Penny, Macy’s and Best Buy are laying off employees and closing stores, in large part because more and more Americans are shopping online.

Lastly, the number of part-time workers (those working fewer than 35 hours per week) rose sharply during the recession, but unlike previous recoveries, has not significantly decreased. Many economists believe the Affordable Care Act has added to the growing pool of part-time employment, not to mention serving as a modest drag on the economy.

The Housing Downturn Remains a Stubborn Hangover on the Economy

The oft-cited ‘American Dream’ has, at its core, the tenet of home ownership. As of mid-2013, home ownership was at an 18- year low, courtesy of the after-effects of the Great Recession.

In addition, home equity declined more than 60% between 2007-09, and the percentage of homeowners with little to no equity (defined as loan-to-values of 80% or greater) remained a high 39.2% of those with mortgages during 2013.

The data lends itself to multiple interpretations, but there is little debate that home ownership and equity are at the heart of wealth in the United States, which impacts the growth of the economy. With fewer people owning homes than since the end of the S&L crisis, and a large percentage of those who do lacking measurable amounts of equity, broad-based consumer spending is dampened. This may also help to explain the continuing problem of U.S. income inequality.

Consumer Confidence Remains Well Below Normal Levels

According to Investopedia, the Consumer Confidence Index is defined as follows:

The Consumer Confidence Index (CCI) is a monthly release from the Confidence Board, a non-profit business group that is highly regarded by investors and the Federal Reserve. CCI is a unique indicator, formed from survey results of more than 5,000 households and designed to gauge the relative financial health, spending power and confidence of the average consumer.

The index now stands at 85.1 as of June, 2014, its highest level in over six years. Before breaking out the champagne, we should note that prior to the recent recession, the last time the index was as low as 85 was 2003. Since its inception, it has often been over 100, peaking at nearly 145 in 2002. Although 85 is an improvement from the levels seen during the depths of the recession, it’s simply not high enough to portend anything better than middling growth for the economy. And that’s exactly where we appear stuck today.

How to Improve the Economy?

Despite massive amounts of stimulus pumped into the economy by the Federal Reserve, growth remains slow. Some even feel the economy is slipping back into recession, although most economists believe the first quarter was impacted by severe winter weather and expect to see improved second quarter growth.

Regardless, there is little that can be done externally to change the direction of the economy. With employment in transition and wealth still squeezed for millions of Americans, it’s going to take time for the economy to fully heal, and for growth to return to a normal pace. And even when it does, the catastrophic damage wrought by the Great Recession won’t soon be forgotten.

As Rose Kennedy once said, “It’s been said that time heals all wounds. I don’t agree. The wounds remain.”

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