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Friday November 24th 2017

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.


How the Recession Has Changed America

No matter where you go and what you do in America, there is a good chance someone is talking about the recession. Nearly everything you hear in the news is centered on the recession. Whatever the topic, it’s skewed to talk about how it has been affected by downturn. Not only has the conversation changed, but Americans are behaving differently as well.

Spending Less

If you were to visit a car dealership, you would probably see a huge inventory of SUVs for sale. People are becoming more conscious of the amount of money they spend. They are also becoming very creative in their methods to save money.

With most of America still feeling the effects of the recession, topped with high gas prices, few people see the value in purchasing a SUV with low gas mileage. Buyers are opting instead for fuel-efficient cars. The recession has subtly curbed the appetite for lavish, expensive luxuries for many of Americans.

Saving More

Since the beginning of the recession, Americans have become thriftier. Savings rates have increased substantially. More individuals are placing their money in savings accounts, hoping to save enough for a possible rainy day.

A large number of people polled by Pew Research admitted to now buying less expensive brands. Over half of the people polled stated that they have canceled vacations. In addition, 33% said that they have cut back on alcohol and tobacco products. Substantial portions (28%) of adults from the ages of 18 to 29 have moved back in with their parents. Individuals are using whatever feasible methods possible to cut back on spending.

Lower Wages

The recession has not only made individuals fearful of losing their jobs, but nearly 35% of Americans earn less than they once did. Many older individuals with decades of work experience have come to the realization that they will never earn the of amount wages they previously earned.

Back to Basics

The recession has created a desire to have a simpler life for many people. There is a change in how people define the American Dream. Fewer people are dreaming of big houses, multiple vehicles, and vacations every year. The recession has curbed the expectations of many people. Families and individuals are becoming more content with living in apartments, riding bicycles, and planning local festivities for their families.

Risk Aversion

Investors who once took on risks in the hopes of earning high returns are becoming more risk averse. Many investors were terrified as they watched their retirement plans and investment portfolios shrink to record lows. The volatility in the stock market has caused investors to put their money in safer investments.

Bond funds and money market accounts are now attracting the majority of new money. The Investment Company Institute reported that poll numbers showed that only 30% of investors were willing to take on substantial risks to earn higher possible returns.

Economists and financial experts say investors will remain risk averse for quite some time. A long-term bull market would need to occur for investors to have enough confidence to invest more money in stocks. The increase in bond investments is also due to Baby Boomers making a transition from stocks to bonds to protect their investment portfolio.

How Long Will it Last?

Some economists believe that the changes in Americans are only temporary. They believe consumers will start spending as that once did when the economy starts improving. Others believe that the recession has permanently changed the mindset of Americans, and spending habits will never return to what they were in the past.

Whether things will continue as is or return to what they once were, it is safe to say that the recession has drastically changed how Americans see the world, their own lives, and their money.