by Harry M. Davis, Ph.D
A majority of Americans believe the U.S. economy is still in a recession even though the economy has been in an expansion for three years. The annualized rate of GDP growth in the first quarter of this year was a very disappointing 2.1 percent after a paltry rate of only 1.7% for 2011. These rates of economic growth are anemic compared to the post WWII experience.
The employment picture is dismal with the unemployment rate still above 8 percent. About 9 million jobs were lost in the “Great Recession” and only about 4 million jobs have been created in the recovery. Jobs created have generally been running less than 200,000 a month which is needed to significantly lower the unemployment rate.
Of particular concern is the structural unemployment problem. Six million people have been unemployed for 26 weeks while over 4 million have been unemployed for 52 weeks. When the unemployed, under employed, and those that have stopped looking for a job are added together that number is about 19% of adults. Many of these individuals do not possess the skills needed to fill jobs that are available; as a result, they are structurally unemployed. Jobs for engineers, nurses, machinists, welders, software engineers, and others go wanting for qualified individuals. Is high unemployment the “new normal”?
The level of debt for households and government are higher now than the level coming out of previous recessions in the post WWII period. Those debt levels combined with little income growth for households have made strong economic growth less likely after each recession. Consumers and governments are trying to lower debt/spending levels which constrains spending. Real after-tax per capita income has been flat for the past year.
The housing sector is improving at a slow pace. Renting rather than ownership is now preferred. Housing starts are driven by apartment building starts while homes prices are still soft in most markets. New home sales are still running at an annualized rate that is less than 350,000, which is very sluggish.
The Federal Reserve (FED) ended QE2 in June 2011, but continues to keep interest rates at historically low levels. Such activity is supposed to increase economic growth. Unfortunately, the FED is pushing on a string and has done about all it can do to stimulate the economy. The FED needs an assist from Washington, but is not likely in an election year.
The state unemployment rate dropped the last three months falling to 9.4% in April. About 30,000 nonfarm jobs were added in the last 12 months. Unfortunately, only three states have a higher unemployment rate. Structural unemployment is a serious problem for North Carolina.
Several serious head winds face the U.S. economy. The Bush tax cuts, reduced withholding taxes, and extended unemployment benefits all expire at the end of this year. Paralysis in Washington means all of these important economic issues will simply be kicked down the road into 2013. As a result of the uncertainty brought about by this lack of action, the business sector will not invest in plant and equipment and workers. Economic growth can only be sluggish until these issues are resolved.
Another head wind is the malaise in southern Europe. The debt problems and continued cut backs in government spending will lead to slow growth for years to come. Our manufacturing sector will be marginally hurt by this decrease in demand for our products.
Our government must cut regulations across the board, flatten the tax code for individuals and businesses, increase infrastructure spending, and promote the development of natural gas and oil exploration. Unless the government starts to act in these areas, high unemployment will become the new normal.
by Harry M. Davis, Ph.D is an economist for the N.C. Bankers Association and a Professor of Banking at Appalachian State University