Monday, May 07, 2012
U.S. Will Bounce From One Economic Crisis To The Next
The U.S. economy appears to be stalling.
Gross domestic product rose at a 2.2% annual rate between January and March, slower than the 3.0% pace in the prior three months. The first-quarter growth reading was lower than expectations.
Economic growth needs to be at least 2.5% to improve the nation's dismal unemployment situation. Anything lower won't even keep up with population growth.
The Commerce Department reported that durable goods orders tumbled 4.2 percent in March, the largest drop in three years. Durable goods range from appliances to aircraft. And recent data also showed that industrial production was flat in March for a second straight month. These are sure signs that the U.S. economy is slowing.
Even before this latest round of bad news, the nation was already grappling with the worst recovery since the early years of the Depression era. For tens of millions of Americans, there has been no recovery at all. And consumer sentiment reflects this.
Consumer confidence remains stuck in recession territory. The consumer-confidence index fell to 69.2 in April from a revised March reading of 69.5, according to the Conference Board. Generally, when the economy is growing at a good clip, confidence readings are at least 90.
Here's the central problem for the U.S. economy: the middle class — the nation's economic engine since the end of the Second World War — is vanishing. And the economy is suffering as a result.
The long term erosion of the middle class has triggered a major loss of purchasing power. The result is chronically inadequate demand for goods and services. Consequently, the economy struggles to grow, leading to further shrinking of what's left of the middle class.
The nation's relentless unemployment issue is only one part of the problem.
From January through April, the economy added an average of about 200,000 jobs a month. Though job growth of any size is obviously a good thing, that pace is not nearly fast enough to recover the losses from the Great Recession and its aftermath in the foreseeable future.
At that rate of job growth, it would take us until 2019 to get back to full employment. The trouble is, the country should actually have even more jobs given population growth and the current size of the economy.
Here's some perspective: the U.S. labor market started 2012 with fewer jobs than it had 11 years ago in January 2001. The only reason the unemployment rate keeps dropping is because people continue dropping out of the labor force. They're too discouraged to continue looking for work. Most worrisome, the largest drop in U.S. labor participation is coming from men 20 years of age and older.
That's a troubling trend.
Believe it or not, the U.S. economy is now producing more goods and services than it did when the recession officially began in December 2007. However, it is doing so with about five million fewer workers. Employers have learned how to produce more with fewer workers. That's good for employers, but bad for workers and the unemployed.
Unemployment aside, the other major issue is stagnant or declining wages for those who still have their jobs.
U.S. corporations are reporting record profits. In fact, they are sitting on a huge pile of money — an excess of $2 trillion — and yet the unemployment / underemployment rate stubbornly remains at 22%.
Clearly, there is still plenty of money in the U.S. economy. The problem is that far too much of it is concentrated at the top and is not being spent into the economy.
American CEOs saw their pay spike 15 percent last year, after a 28 percent pay rise the year before. That's in line with a trend that dates back three decades.
CEO pay spiked 725 percent between 1978 and 2011, while worker pay rose just 5.7 percent, according to a recently released study by the Economic Policy Institute. That means CEO pay grew 127 times faster than worker pay.
Last year, CEOs earned 209.4 times more than workers, compared to just 26.5 times more in 1978.
As long as all of that money remains concentrated at the top, instead of being fairly paid to workers in the form of salaries and wages, the nation will remain in decline.
Wealthy Americans spend a much smaller portion of their incomes than does the large, but shrinking, middle class. There are only so many houses, yachts and exotic sports cars the wealthy will buy.
Big U.S. companies have emerged from the deepest recession since World War II more productive, more profitable, flush with cash and less burdened by debt, says the Wall Street Journal.
An analysis by the Journal of corporate financial reports finds that cumulative sales, profits and employment last year among members of the Standard & Poor's 500-stock index exceeded the totals of 2007, before the recession and financial crisis.
But judging by the way the economy is performing, and by the number of people requiring unemployment and other government assistance, you'd never know it. These huge corporate profits haven't translated into an adequate number of good-paying jobs.
Instead, companies have driven their employees — fearful of losing their jobs — into becoming increasingly more productive.
Overall, the Journal found that S&P 500 companies have become more efficient, and more productive. In 2007, the companies generated an average of $378,000 in revenue for every employee on their payrolls. Last year, that figure rose to $420,000.
While corporations and CEO's prosper, ordinary Americans continue to suffer, many of them toiling away in low wage jobs.
Out of 34 industrialized countries, the U.S. had the highest share of employees doing low-wage work in 2009, according to OECD data.
One-in-four U.S. employees were low-wage workers in 2009, according to the OECD. That is 20 percent higher than in the number-two country, the United Kingdom. Low-wage work is defined as earning less than two-thirds of the country's median hourly wage.
There are far too many low-wage earners for the economic well-being of the country. That's not good for a country in which 70 percent of the economy is driven by consumer spending. That sort of consumption seems unsustainable.
According to a recent study by University of California economist Emmanuel Saez, based on an analysis of American tax returns, in 2010, 93 percent of all new income growth went to the top 1 percent of American households. Everyone else, the bottom 99 percent, divided up the remaining 7 percent.
Again, as long as the middle-class continues to shrink and doesn't have adequate wages to spend back into the economy, this predicament will not only continue, but will worsen.
There is a widespread feeling of foreboding that the economy is not just stalling, but may in fact be headed for yet another contraction, resulting in a double-dip recession.
Famed economist Nouriel Roubini said the U.S. economy could fall into stagnation in 2013 and ultimately put the nation into the second half of a double-dip recession. Roubini, who correctly predicted the housing-market crash and recession of 2008-09, noted that real wages for U.S. workers are not growing and that America’s crushing debt is strangling growth. Roubini said that GDP will be “lucky” to grow 2% this year and the U.S. could retreat into near-zero growth next year.
And prominent Yale economist Robert Shiller, the designer of the Standard & Poor’s/Case-Shiller house price index, says that the global economy is mired in a "late Great Depression", despite the stimulus policies of central banks. Shiller says the world is in a “new age of austerity" and also says housing prices will drop by a further 20 percent as the downturn gripping the United States deepens.
All of that sounds quite stark. Yet, these two guys know what they're talking about. They've made accurate calls in the past. Both men can see the writing on the wall. And it isn't good.
Due to the financial crisis, the Great Recession and the subsequent stagnation, the federal government is dealing with a huge falloff in revenues. Meanwhile, there has been an enormous increase in consequent safety net payments for unemployment, food stamps and Medicaid. This is the reason for our continued annual deficits.
Government spending has actually fallen for six straight quarters as Recovery Act funds have been exhausted and state and local governments have struggled with tax revenue shortfalls.
Congress will be forced to act to address its fiscal crisis, or else the nation's credit rating could be downgraded yet again. Such a downgrade may inevitable no matter what Congress does. Yet, the legislative branch is now so dysfunctional that it would surprise no one if they fumble yet again.
The failure of Congress and the White House to agree on taxes and spending next year could spell doom for the economy.
Early next year, the government is set to enact huge budget cuts, while allowing the Bush tax cuts and the payroll tax cuts to expire. The likely result will be a choke hold on the already struggling economy.
We are finally seeing the limits of fiscal and monetary policies.
The Fed has pumped $2 trillion into the financial system, slashed overnight interest rates to zero and made the unprecedented promise to keep them there for an extended period. Yet, this is the best that monetary policy can do.
For good reason, Americans have little confidence in any of the institutions pulling the strings on the U.S. economy: Congress, the Federal Reserve or corporate America.
Europe is already in recession, and the U.S. is almost certain to follow. It is against this backdrop that the U.S. braces for yet another storm. We can only hope that we are not dashed upon the rocks like an old ship.
Given our structural deficiencies, it now seems that the U.S. is doomed to bounce from one economic crisis to the next. This seems to have become a way of life for us. It's a tough thing to get used to.