A midterm report on the economy
We’ve reached the halfway point of 2013. We are nearing the fifth anniversary of the most intense phase of the great financial crisis and are at the fourth anniversary of the beginning of the recovery from the Great Recession. So how are we doing?
We (still) aren’t living up to our potential.
The broadest measure of how the economy is doing is gross domestic product, the value of all goods and services produced within U.S. borders in a given time period. And it has been rising only slowly: 1.8 percent in the first three months of 2013. The government’s first take on the second-quarter number will be released July 31.
Here’s a better way to think of GDP, though: not as a raw number or even a percent change, but as how the U.S. economy is doing relative to its potential. That is, if almost everyone who wanted a job had one, if factories were running at capacity, if office buildings were full, how much more economic activity would we have? The answer is quite a lot.
That output gap was $843 billion (at an annual rate) in the first quarter of 2013, meaning that the nation would need to crank out goods and services at a rate 6 percent faster than it is to be functioning at its potential. The good news: That’s smaller than the $949 billion output gap at the start of 2009. The bad news: It actually rose over the past year, from $811 billion in the first quarter of 2012. Until that changes, the economy isn’t going to feel very good.
Jobs, jobs, jobs.
The biggest problem facing the economy since the end of the recession has been a moribund employment market. So are we making any progress changing that?
The most widely watched measure of the job market is the unemployment rate, or the percentage of people who want a job but can’t find one. By that measure, the job market is indeed recording steady progress. From a recent high of 10 percent in October 2009, the figure fell to 7.6 percent in May and was on a gradual downward track. The June number will be released Friday, and analysts expect it to be 7.5 percent.
But the unemployment rate alone doesn’t tell you everything you need to know about the job market; a substantial part of the decline in the rate has come not because people are finding work, but because they are dropping out of the labor force. A measure that adjusts for that phenomenon is the employment-to-population rate, the proportion of the total U.S. population that has a job. And by that measure, there is less progress.
During the recession, the employment-population ratio took a steep dive. But it has recovered only a smidgen: from a low of 58.2 percent in November 2010 to 58.6 percent in May. That’s the same level as in December. In other words, no progress has been made in putting more Americans to work in 2013.
Part of that phenomenon is probably demographic -- as the baby-boom generation has hit retirement age, more people may be leaving the workforce voluntarily. One way to avoid that is to look at the employment level of men ages 25 to 54, a group that is in prime working years and for which the numbers aren’t affected by the long-term shift of women into the workforce. Alas, this measure, too, shows something closer to stagnation in the job market.
But what matters for those looking for employment is how many openings there are. And in this area, there is a little more relief. The ratio of job seekers to job openings peaked at 6.7 in July 2009 but fell quite a bit, to 3.1, in April. A caveat to the good news is that the ratio is still higher than it was at its highest point in the aftermath of the 2001 recession. Still, this is an area of progress in the job market, if uneven and halting.
Where’s the growth coming from?
The accompanying chart shows how much various segments of the economy contributed to growth in the first three months of the year.
The biggest driver of economic activity right now is the American consumer, who is finally spending more freely. Business spending is rising only slowly. Housing is a plus, but it is off such a small base that construction activity isn’t really moving the dial much for overall growth. And decreasing government spending is subtracting from growth.
So what’s driving the consumer? Well, a few things. The stock market has been rising: The Standard & Poor’s 500 index, even after a recent swoon, is up 13 percent for the year. Home prices are rising, too, with the S&P/Case-Shiller Home Price Index for 20 major metro areas up 12 percent.
The result: Americans are wealthier. And they also have made some progress getting out from under the debts that accumulated during three decades that preceded the crisis. Total household liabilities were down $875 billion from 2007 levels in the first quarter, a 6 percent drop.
So what’s holding the economy back?
Consumers are in better shape. The forces that have been holding back the recovery for the past several years, particularly housing weakness and consumer debt, have abated. So what’s restraining growth? Well, an important part of the story seems to be the retrenchment by government at all levels.
Since the third quarter of 2009, the level of government consumption and investment spending has fallen 7.4 percent in inflation-adjusted terms. That has amounted to a steady drag on whatever growth the private sector has been able to muster. By comparison, in many past downturns, such as the 2001 recession, government spending rose steadily in the aftermath.
The question for the remaining six months of 2013, then, is which will prove more powerful: The contracting drag coming from government? Or the improvement in the private sector, including in housing and household balance sheets?
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