Mixed News: U.S. Economy Still Up and Down

In the aftermath of the subprime mortgage crisis, the economy quickly fell into recession as credit markets tightened up considerably due to fears of continued losses. Despite the efforts of government policy makers to revive the gasping economy, things remain in a precarious state. The Treasury Department arranged for a bailout for many of the largest investment banks, most of whom were holding on to billions of worthless assets. Congress agreed to a $800 billion stimulus package in an attempt to boost overall demand throughout the economy. In addition, the Federal Reserve is already engaging in its second round of quantitative easing, buying up large amounts of Treasury bonds to keep short-term interest rates near zero percent. It’s begging to feel a bit like an amusement park ride.

Officially, the American economy has snapped out of the recession. GDP growth in the first quarter was 1.8 percent, a not very strong number but an increasing one nonetheless. Overall, the recovery has been very anemic. Indeed, there are real fears that the economy could slip into a double-dip recession unless appropriate measures are taken. Of course, there have been a few positive signs in the economy over the past year. The stock market did very well in 2010; the S&P 500 returned 15 percent last year. Many businesses appear to be recovering from the 2008 recession, although they seem reluctant to reinvest those profits given the precarious state of the economy. Unemployment has been trending downward over the past few months, but few economists would call such job growth numbers encouraging.

Unfortunately, there seems to be as many negative numbers as positive ones. Hourly wage growth grew at only two percent last year. And this has been part of a much longer trend of stagnant wage growth over the past thirty years, especially for those in the lower-half of the income distribution. It is true that this is at least partially due to increases in health care expenditures made by employers on behalf of employees, but there has been a disconnect between productivity and wages. As long as unemployment remains so high, there will be little upward pressure on wages.

The even more discouraging fact is that unemployment is probably even higher than the official rate reported by the government. Once you account for workers who are underemployed, such as full-time workers only working part-time or workers in jobs well below their skill set, and workers who have dropped out of the job market completely, the unemployment rate is closer to 15 percent.

As wages have stagnated or fallen, many workers are seeing their standard of living fall thanks to rising prices in many consumer staples like gasoline and food. Indeed, gasoline is quickly reaching an average of $4 a gallon, further reducing available disposable income. Overall, food prices are expected to rise four percent this year, although many important foodstuffs will increase in price even more than that.

On top of all of this, the government is currently operating under a $1.6 trillion budget deficit. As the debate in Washington turns from economic stimulus to debt reduction, the government may inadvertently squash a nascent recovery by reducing aggregate demand through broad-based spending cuts. Indeed, some economists have argued that even more spending may be necessary to boost the economy suffering under a large amount of excess capacity.

Unfortunately, the American economy is suffering from a variety of woes and it appears that the government has already exhausted most of its standard policy prescriptions. Interest rates are as low as they are going to get and government spending is not likely to get any higher. In the end, we can likely expect a very slow recovery into the foreseeable future.