4 Ways to Fuel the Economic Recovery
The economic recovery of the United States has been a gradual process that has perpetually been in the news, in politics, and in the minds of all Americans as student loans debt increases and jobs become harder to find. But there has been recovery, despite the politicians and pundits saying otherwise; this is an examination of what caused growth or stagnation in the U.S. economy and the global marketplace, and what to expect moving forward.
1. Job Creation
As the second financial quarter of this year ends and the third begins, it was reported that the second quarter held the worst job growth in the past two years. The first quarter reported an average of 226,000 jobs created per month and the second quarter an average of 75,000 per month, a much lower average than anticipated. What caused the slower pace of job growth? One possible factor is the weather; the country experienced a mild winter, possibly accelerating construction projects on infrastructure that creates jobs and growth. Another possible explanation is that the government only recorded data from the public sector, while 176,000 additional jobs were added in the private sector (and half of those were in small businesses). Since 2008, 9 million jobs in total have been lost; only 3 million have been gained back to date. Another contributing factor is connected to the Keynesian paradox of thrift, as offices that are not hiring new personnel are also not expanding; those that may have closed down do not need more office space. Without the necessity for more offices, the construction sector is out of work, and those workers do not have money to spend on retail and consumer goods. Therefore, every sector is connected and every job impacts another.
2. Housing Market
The housing market has stabilized in the past five to six months, perhaps the best indication of recovery since the housing market first contributed to the recession in 2008. The cycle began as interest rates and monthly payments dropped, allowing people to afford larger houses with adjustable rate mortgages. As housing demand increased, house prices went to record highs. As we now know, many of those mortgages made during the housing bubble were made to subprime borrowers, and soon after interest rates and monthly payments increased until people could no longer afford them and they were forced into foreclosure. The middle class was hit the hardest when the bubble burst; most of their wealth is in real estate and not in financials, and as prices and equity went down, so did their wealth. The median net wealth dropped 39% between 2007 and 2010, regressing to 1992 levels of wealth without accounting for inflation and accumulation of wealth over a twenty year period. Household debt has dropped from the September 2007 peak of nearly 131% to 109% in March 2012. Slowly, demand is rising again and prices are going up with the excess supply of homes as many people have resorted to renting single and multifamily homes. As those rents become higher each month and landlord profits soar, people are more eager to invest in their own homes to move out of multiple family units, apartments, and their parents' basements, causing an inflection point for the first time in five years. The median house price in April 2012 was nearly 5% higher than in 2011 and existing home sales were up nearly 10% since 2011, showing some growth that should instill more confidence.
3. Keynes' Paradox of Thrift
The Keynesian theory of the paradox of thrift, most eloquently reintroduced as a warning in 2009, states that individual savings collectively hurt the economy and its capacity to grow. There exists little to no consumer confidence due to high unemployment rates and uncertainty about the economy at large. Those who are unemployed are saving their money because they have no income, and those who are employed are afraid of high unemployment rates because of fear of losing the job they have or the reluctance to ask for a raise if they are not making enough money. Regardless, they won't be spending money on consumer discretionary goods. Likewise, small businesses are holding onto cash rather than investing, resulting in total sequestration of liquidity in the markets. As money is pumped in, more money is pumped out, as President George W. Bush infamously told Americans to go shopping in order to boost the economy in 2006. The other theory, pushed primarily by Speaker John Boehner and the right-wing debt-hawks, is that Obama's overspending has worsened the crisis and instead have pushed the country towards default. However, between 2010 and 2011 spending picked up by exactly 1%, the percentage saved because of the holiday paycheck credit granted at the end of 2010 for certain low-income families.The middle-ground perspective between Keynes and the debt-hawks is perhaps best presented in this article published by the Atlantic.
4. Overseas Risk: Euro Zone and China
What happens in the Euro zone and China will be extremely important to the United States economy for this year. Despite the latest analysis that propagates the unlikelihood of a hard-landing in China, it could still be a severe impact on the U.S. through fewer purchases of treasury bonds and far less manufacturing. U.S. banks and financials are tied to European banks, which could result in a contagion effect, and despite the fact that U.S. exports to Europe are 3% of total US GDP, trade will shrink with demand and could cause a worldwide domino effect as in 2009.
The risk of falling into another recession is 25%. It's clear that consumer confidence must increase and the country cannot afford to fall off of the fiscal cliff at the end of this year. Central government debt as a percent of GDP in 2010 for the United States was 70%, a low number but with risk now increasing with a projected percentage of 415% in 2050 without any modifications to our current taxation system, as well as Medicare and Social Security. Obama's stimulus bills have been successful thus far but have only been a short-term solution to the greater problem of fixing the country's mounting debt problem and future financial health.