Archive for the ‘Recession’ Category
The government announced that the unemployment rate fell in August, down to 7.3 percent from 7.4 percent in July. But there is little reason for cheer. As Business Week explained:
The worrisome part is why the rate fell. The size of the workforce declined by about 300,000 and the participation rate fell to 63.2 percent from 63.4 percent—the lowest since August 1978. The participation rate is the number of people either working or actively searching for work as a share of the working-age population. It rose steadily over the years as more women entered the workforce before falling sharply in the 2007-09 recession, and it hasn’t recovered since.
In other words, the unemployment rate continues to fall only because people continue to lose hope of finding a job. The chart below shows the trend in the U.S. labor force participation rate.
The following chart highlights one reason for our dismal employment record. In contrast to previous recoveries, state and local government spending has been slashed, resulting in an ongoing contraction in state and local employment, with negative consequences for private sector employment as well.
And, it is worth emphasizing, this shrinking labor force participation rate, which represents a clear failure on the part of our economic system to create jobs, is taking place during a period of economic expansion. One can only shudder at what lies ahead for working people when this expansion finally ends in a new recession.
Despite the declining rate of unemployment—-it fell to 7.4% in July, the lowest level since December 2008—it is clear that economic trends, especially the rate and nature of job creation, are far from desirable.
As the Wall Street Journal explains:
The U.S. labor market’s long, slow recovery slowed further in July—and many of the jobs that were created were in low-wage industries.
Employers added a seasonally adjusted 162,000 jobs in July, the fewest since March, the Labor Department said Friday, and hiring was also weaker in May and June than initially reported. Moreover, more than half the job gains were in the restaurant and retail sectors, both of which pay well under $20 an hour on average. . . .
The falling jobless rate reflects to some degree a pace of hiring that, though slow, has remained steady over the past year even as the broader economy has grown in fits and starts. The U.S. has added an average of 192,000 nonfarm jobs per month so far this year, hardly a robust pace but more than enough to keep up with population growth.
But the drop in the unemployment rate is also the result of a job market that remains too weak to draw back workers who have dropped out of the labor force. Some 6.6 million workers say they want a job but don’t count as unemployed because they aren’t actively looking, a number that has barely budged in the past year. The number of Americans working or looking for work fell by 37,000 in July; as a share of the population, the labor force remains near a three-decade low. . . .
President Barack Obama has stressed the need for good jobs, including during a visit this past week to an Amazon.com Inc. facility in Chattanooga, Tenn., where he called for “a better bargain for the middle class.”
The day before the president’s visit, the Internet retail giant said it was adding more than 5,000 full-time jobs in its distribution centers across the country. Many of the jobs pay $11 an hour or less, although the company said workers will qualify for health insurance and other benefits, including stock grants and tuition subsidies.
“In our viewpoint these are great jobs,” Amazon spokeswoman Kelly Cheeseman said.
But the proliferation of low-wage jobs is leading to anemic growth in incomes. Average hourly wages were up by less than 2% in July from a year earlier, continuing a pattern of weak wage growth in the recovery. A broader measure of income released by the Commerce Department on Friday showed that inflation-adjusted incomes actually fell slightly in June.
The following chart, from a Washington Post article, helps highlight the problematic nature of U.S. job growth. By far the greatest number of jobs lost during the recession were mid-wage jobs. And by far the greatest number of jobs created during the recovery have been low-wage jobs.
Even worse, almost all the jobs created over the last six months have been part-time. According to a McClatchy report:
The unemployment rate is measured by the separate Household Survey, and it fell two-tenths of a percentage point to 7.4 percent, its lowest level since December 2008. That’s due in part to slow growth in the labor force. The jobless rate is based on a sample of self-reporting from ordinary people across the nation, and it’s the Labor Department measure that shows a very troubling trend in hiring.
“Over the last six months, of the net job creation, 97 percent of that is part-time work,” said Keith Hall, a senior researcher at George Mason University’s Mercatus Center. “That is really remarkable.”
Hall is no ordinary academic. He ran the Bureau of Labor Statistics, the agency that puts out the monthly jobs report, from 2008 to 2012. Over the past six months, he said, the Household Survey shows 963,000 more people reporting that they were employed, and 936,000 of them reported they’re in part-time jobs.
“That is a really high number for a six-month period,” Hall said. “I’m not sure that has ever happened over six months before.”
No wonder workers are struggling to make ends meet—job creation is weak and most of the jobs being created are low paying and part time. But it is not like corporations don’t care. For example, McDonald’s Corporation teamed with Visa to offer its workers a helping hand: a web page with advice about how to budget better. This must be a great help to workers that earn on average about $8.25 an hour.
The McDonald’s working budget, shown below, is a bit hard to interpret. What is clear however is that the company expects workers to have two jobs, pay $20 a month for health care, nothing for heat, $600 a month for rent, and . . .
For insight into what it is like to live on a McDonald’s wage, check out the Bloomberg story on Tyree Johnson, a 20 year employee still making minimum wage. Corporations like McDonalds don’t pay these low wages because they are hurting but rather because they help their bottom line, as the following graphic from the Bloomberg story shows.
Corporate apologists often argue that these jobs are just “starter” jobs for high school students seeking to earn money for some extra like a smart phone. But as the New York Times notes, only 14% of those earning between the minimum wage and $10 an hour are less than 20 years old.
As Steven Greenhouse reports, fast food and other low wage workers have begun organizing and striking to improve their working conditions; they are demanding a $15 hourly wage:
In recent weeks, workers from McDonald’s, Taco Bell and other fast-food restaurants — many of them part-time employees — have staged one-day walkouts in New York, Chicago, Detroit and Seattle to protest their earnings, typically just $150 to $350 a week, often too little to support themselves and their families. More walkouts are expected at fast-food restaurants in seven cities on Monday. Earlier this month hundreds of low-wage employees working for federal contractors in Washington walked out and picketed along Pennsylvania Avenue to urge President Obama to press their employers to raise wages.
These workers are taking real risks and if successful their gains would likely boost living and working conditions for most U.S. workers. They deserve our strong support.
Media and policy-makers seem anxious to convince us that the economy is in strong recovery mode. Therefore no further significant policy interventions are needed.
Their optimism appears to rest heavily on the recent acceleration in consumer spending. After all, there are strong reasons for concern with the other major sources of growth: government spending on all levels is being cut, exports face a weakening world economy, and business investment remains largely stagnate.
But there are also strong reasons to challenge this optimistic view of consumer spending as a growth engine. The charts below, from a Wall Street Journal article, highlight some of the most important.
As we see below, while consumption spending is indeed accelerating, after tax personal income is falling. In other words, there appears little reason to believe that there is a solid foundation for sustaining this trend.
Additionally, after four years of recovery we still have 2.4 million fewer jobs than we had at the start of the recession. Moreover, as we see below, there has been no real wage growth. In fact, real average wages have fallen for most of the so-called expansionary period.
Yes, housing values are finally starting to rise and household debt payments as a share of after-tax income are declining. But to a large extent the new burst in consumption spending has more to do with renewed borrowing than solid gains in job creation and income.
Unfortunately, there is little reason for us to have confidence that the economy is gathering strength in ways that will be sustainable or benefit the great majority of working people.
One of the subthemes of current discussions about how best to reduce our national debt is that we must reign in out-of-control spending on federal safety net programs. The reality is quite different.
The chart below shows spending trends in terms of GDP for the ten major needs-tested benefit programs that make-up our federal social safety net. The programs, in the order listed on the chart, are:
- The refundable portion of the health insurance tax credit enacted in the 2010 health care reform law
- Medicaid and the Children’s Health Insurance Program (CHIP)
- The Supplemental Nutrition Assistance Program (SNAP)
- Financial assistance for post-secondary students (Pell Grants)
- Compensatory Education Grants to school districts
- Assisted Housing
- The Earned Income Tax Credit (EITC)
- The Additional Child Tax Credit (ACTC)
- Supplemental Security Income (SSI)
- Family Support Payments
As Jared Bernstein explains:
for all the popular wisdom that programs to help low-income people are swallowing the economy, the truth is that like so much else that plagues our fiscal future, it’s all about health care spending. The figure shows that as a share of GDP, prior to the Great Recession, non-health care spending was cruising along at around 1.5% for decades. It was Medicaid/CHIP (Medicaid expansion for kids) that did most of the growing.
Regardless, the recent explosion in the ratio of Medicare/CHIP spending to GDP is largely due to the severity of the Great Recession, not the generosity of the programs. The recession increased poverty and thus eligibility for the programs, thereby pushing up the numerator, while simultaneously lowering GDP, the denominator. Moreover, spending on all non-health care safety net programs is on course to dramatically decline as a share of GDP. Even Medicare/Chip spending is projected to stabilize as a share of GDP.
These programs are essential given the poor performance of the economy and in most cases poorly funded. Cutting their budgets will not only deny people access to health care, housing, education, and food, it will also further weaken the economy, in both the short and long run.
There is growing talk that the economy is finally on its way to recovery—“A Steady, Slo-Mo Recovery”—in the words of Businessweek.
Here is how Peter Coy, writing in Businessweek, explains the growing consensus:
Job growth is poised to continue increasing tax revenue, which will make it easier to shrink the budget deficit while keeping taxes low and preserving essential spending. All this will occur without any magic emanating from the Oval Office. It would have occurred if Mitt Romney had been elected president. “The economy’s operating well below potential, and there’s a lot of room for growth” regardless of who’s in office, says Mark Zandi, chief economist of forecaster Moody’s Analytics.
Something could still go wrong, but the median prediction of 37 economists surveyed by Blue Chip Economic Indicators is that during the next four years, economic growth will gather momentum as jobless people go back to work and unused machinery is put back into service. “The self-correcting forces in the economy will prevail,” predicts Ben Herzon, senior economist at Macroeconomic Advisers, a forecasting firm in St. Louis.
Before we get lulled to sleep, we need some perspective about the challenges ahead. How about this: we face a 9 million jobs gap, and this doesn’t even address the low quality of the jobs being created.
The chart below, taken from an Economic Policy Institute blog post, illustrates the gap.
As Heidi Shierholz, the author of the post, explains:
The labor market has added nearly 5 million jobs since the post-Great Recession low in Feb. 2010. Because of the historic job loss of the Great Recession, however, the labor market still has 3.8 million fewer jobs than it had before the recession began in Dec. 2007. Furthermore, because the potential labor force grows as the population expands, in the nearly five years since the recession started we should have added 5.2 million jobs just to keep the unemployment rate stable. Putting these numbers together means the current gap in the labor market is 9.0 million jobs. To put that number in context: filling the 9 million jobs gap in three years—by fall 2015—while still keeping up with the growth in the potential labor force, would require adding around 330,000 jobs every single month between now and then.
Unfortunately, our “job creators” only created 171,000 net jobs in October. And that was considered a relatively good month. The chart below, from the Center on Budget and Policy Priorities, gives a sense of what we are up against.
Of course, weak job growth in the past doesn’t mean that we cannot have strong job growth in the future. On the other hand, such a change would require consensus on radically different policies than those currently being discussed and debated by those in power.
Politicians always seem to be talking about the middle class. They need some new focus groups. According to the Pew Research Center, over the past four years the percentage of adult Americans that say they are in the lower class has risen significantly, from a quarter to almost one-third (see chart below).
Pew also found that the demographic profile of the self-defined lower class has also changed. Young people, according to Pew, “are disproportionately swelling the ranks of the self-defined lower classes.” More specifically some 40% of those between 18 to 29 years of age now identify as being in the lower classs compared to only 25% in 2008.
Strikingly the percentage of whites and blacks that see themselves in the lower class is now basically equal. The percentage of whites who consider themselves in the lower class rose from less than a quarter in 2008 to 31% in 2012. This brought them in line with blacks, whose percentage remained at a third. The percentage of Latinos describing themselves as lower class rose to 40%, a ten percentage point increase from 2008.
And not surprisingly, as the chart below shows, many who self-identify as being in the lower class are experiencing great hardships. In fact, one in three faced four or all five of the problem addressed in the survey.
In short, there is a lot of hurting in our economy.
The media has focused on the lack of jobs as a major election issue. But the concern needs to go beyond jobs to the quality of those jobs.
As a report by the National Employment Law Project makes clear, we are experiencing a low wage employment recovery. This trend, the result of an ongoing restructuring of economic activity, has profound consequences for issues of poverty, inequality, and community stability.
The authors of the report examined 366 occupations and divided them into three equally sized groups by wage. The lower-wage group included occupations which paid median hourly wages ranging from $7.69 to $13.83. The mid-wage group range was from $13.84 to $21.13. The higher-wage group range was from $21.14 to $54.55.
The figure below shows net employment changes in each of these groups during the recession period (2008Q1 to 2010Q1) and the current recovery (2010Q1 to 2012Q1). Specifically:
- Lower-wage occupations were 21 percent of recession losses, but 58 percent of recovery growth.
- Mid-wage occupations were 60 percent of recession losses, but only 22 percent of recovery growth.
- Higher-wage occupations were 19 percent of recession job losses, and 20 percent of recovery growth.
The next figure shows the lower-wage occupations with the fastest growth and their median hourly wages. According to the report, three low-wage industries (food services, retail, and employment services) added 1.7 million jobs over the past two years, 43 percent of net employment growth. According to Bureau of Labor Statistics projections these are precisely the occupations that can be expected to provide the greatest number of new jobs over the next 5-10 years.
As the final figure shows, the decline in mid-wage occupations predates the recession. Since the first quarter of 2001, employment has grown by 8.7 percent in lower-wage occupations and by 6.6 percent in higher-wage occupations. By contrast, employment in mid-wage occupations has fallen by 7.3.
Significantly, as the report also notes, “the wages paid by these occupations has changed. Between the first quarters of 2001 and 2012, median real wages for lower-wage and mid-wage occupations declined (by 2.1 and 0.2 percent, respectively), but increased for higher-wage occupations (by 4.1 percent).”
A New York Times article commenting on this report included the following:
This “polarization” of skills and wages has been documented meticulously by David H. Autor, an economics professor at the Massachusetts Institute of Technology. A recent study found that this polarization accelerated in the last three recessions, particularly the last one, as financial pressures forced companies to reorganize more quickly.
“This is not just a nice, smooth process,” said Henry E. Siu, an economics professor at the University of British Columbia, who helped write the recent study about polarization and the business cycle. “A lot of these jobs were suddenly wiped out during recession and are not coming back.”
Steady as she goes is just not going to do it and changes in taxes and spending programs, regardless of how significant, cannot compensate for the increasingly negative trends generated by private sector decisions about the organization and location of, as well as compensation for production.
Its election season and Republicans and Democrats are working hard to demonstrate that they support dramatically different policies for rejuvenating the economy.
While the Democratic Party’s call for more government spending makes far more sense than the Republican Party’s call for cuts in government spending (see below), the resulting back and forth hides the far more serious reality that our existing economic system no longer appears capable of supporting meaningful social progress for the great majority of Americans.
The chart below helps to highlight our economy’s worsening stagnation tendencies. Each point shows the 10 year annual average rate of growth and the chart reveals a decade long growth trend that is moving sharply downward.
As David Leonhardt explains:
The economy’s recent struggles arguably began in late 2001, when a relatively mild recession ended and a new expansion began. The problem with this new recovery was that it wasn’t especially strong. From the fourth quarter of 2001 through the fourth quarter of 2007 (when the financial crisis began), the economy grew at an average annual rate of only 2.7 percent. By comparison, the average annual growth rate of both the 1990s and 1980s expansions exceeded 3.5 percent.
This mediocre expansion was followed by the severe recession and weak recovery brought on by the financial crisis. The combined result is that, in recent years, the economy has posted its slowest 10-year average growth rates since the Commerce Department began keeping statistics in 1947.
In fact, the economic growth figures for the period 1995 to 2007 were artificially propped up by a series of bubbles, first stock and then housing. Once those bubbles popped, average growth rates began steadily falling.
The weakness (and unbalanced nature) of our current weak recovery is well captured in the following chart from Catherine Rampell, which compares the percent change in various indicators in the current recovery (which began in June 2009) with previous post-war recoveries. The first point to stress is that the current recovery lags the average in all indicators but one: corporate profits. The second is that government spending has actually been falling during the current recovery, no doubt one reason that the percent increase in so many indictors remains below the average in previous recoveries; the public sector is actually smaller today than it was three years ago.
The relative strength in the performance of corporate profits helps to explain why the two established political parties feel no real pressure to focus on our long term economic problems; corporations just don’t find the current situation problematic despite the economy’s weak overall economic performance.
Even more telling of the growing class divide is the explosion in income inequality over the last thirty years, which is illustrated in the following chart.
In other words, while corporations have succeeded in raising profits at the expense of wages, those in the top income brackets have been even more successful in raising their income at the expense of almost everyone else. Notice, for example, that median household income in 2010 is roughly where it was in the late 1980s while the median income of the top households racked up impressive gains. Thus, the very wealthy have every reason to do what they are currently doing, which is using their wealth to ensure that candidates restrict their economic proposals to reforms that will do little to change the existing system.
The takeaway: without a mass movement demanding change, election debates are unlikely to seriously address our steady national economic decline.
The Pew Research Center recently published a report titled “Pervasive Gloom About the World Economy.” The following two charts come from Chapter 4 which is called “The Causalities: Faith in Hard Work and Capitalism.”
The first suggests that the belief that hard work pays off remains strong in only a few countries: Pakistan (81%), the U.S. (77%), Tunisia (73%), Brazil (69%), India (67%) and Mexico (65%). The low scores in China, Germany, and Japan are worth noting. This is not to say that people everywhere are not working hard, just that many no longer believe there is a strong connection between their effort and outcome.
The second chart highlights the fact that growing numbers of people are losing faith in free market capitalism. Despite mainstream claims that “there is no alternative,” a high percentage of people in many countries do not believe that the free market system makes people better off.
GlobeScan polled more than 12,000 adults across 23 countries about their attitudes towards economic inequality and, as the chart below reveals, the results were remarkably similar to those highlighted above. In fact, as GlobeScan noted, “In 12 countries over 50% of people said they did not believe that the rich deserved their wealth.
It certainly seems that large numbers of people in many different countries are open to new ways of organizing economic activity. This is a hopeful development.
The conventional wisdom seems to be that our biggest economic challenge is runaway government spending. The reality is that government spending is contracting and pulling economic growth down with it. And worse is yet to come.
Perhaps the best measure of active government intervention in the economy is something called “government consumption expenditure and gross investment.” It includes total spending by all levels of government (federal, state, and local) on all activities except transfer payments (such as unemployment benefits, social security, and Medicare).
The chart below shows the yearly percentage change in real government consumption expenditure and gross investment over the period 2000 to 2012 (first quarter). As you can see, while the rate of growth in real spending began declining after the end of the recession, it took a nose dive beginning in 2011 and turned negative, which means that government spending (adjusted for inflation) is actually contracting.
The following chart, which shows the ratio of government consumption expenditure and gross investment to GDP, highlights the fact that government spending is also falling as a share of GDP.
Adding transfer payments, which have indeed grown substantially because of the weak economy, does little to change the picture. As the chart below shows, total government spending in current dollars, which means unadjusted for inflation, has stopped growing. If we take inflation into account, there can be no doubt that total real government spending, including spending on transfer payments, is also contracting.
The same is true for the federal government, everyone’s favorite villain. As the next chart shows, total federal spending, unadjusted for inflation, has also stopped growing.
Not surprisingly, this decline in government spending is having an effect on GDP. Real GDP in the 4th Quarter of 2011 grew at an estimated 3 percent annual rate. The advanced estimate for 1st Quarter 2012 GDP growth was 2.2 percent. A just released second estimate for this same quarter revised that figure down to 1.9 percent. In other words, our economy is rapidly slowing.
What caused the downward revision? The answer says Ed Dolan is the ever deepening contraction in government spending:
What is driving the apparent slowdown? It would be comforting to be able to blame a faltering world economy and a strengthening dollar, but judging by the GDP numbers that does not seem to be the case. The following table (see below) shows the contributions of each sector to real GDP growth according to the advance and second estimates from the Bureau of Economic Analysis. Exports, which we would expect to show the effects of a slowing world economy, held up well in the first quarter. In fact, the second estimate showed them even stronger than did the advance estimate. The contribution of private investment also increased from the advance to the second estimate, although not by as much. Exports and investment, then, turn out to be the relatively good news, not the bad, in the latest GDP report.
Instead, the largest share of the decrease in estimated real GDP growth came from an accelerated shrinkage of the government sector. The negative .78 percentage point decrease of the government sector is the main indicator that we are already on the downward slope toward the fiscal cliff.
If current trends aren’t bad enough, we are rapidly approaching, as Ed Dolan noted, the “fiscal cliff.” That is what I was referring to above when I said that worse is yet to come. As Bloomberg Businessweek explains:
Last summer, as part of its agreement to end the debt-ceiling debate (debacle?), Congress strapped a bomb to the economy and set the timer for January 2013. Into it they packed billions of dollars of mandatory discretionary spending cuts, timed to go off at exactly the same time a number of tax cuts [for example, the Bush tax cuts and the Obama payroll-tax holiday] were set to expire
The congressional deficit supercommittee had a chance to disarm the bomb last fall, but of course it didn’t. And so the timer has kept ticking. The resulting double-whammy explosion of spending cuts and tax increases will likely send the economy careening off a $600 billion “fiscal cliff.”
The fiscal contraction will actually be even worse, since the extended unemployment benefits program is also scheduled to expire at the end of the year.
So, what does all of this mean? According to Bloomberg Businessweek:
If Congress does nothing, the U.S. will almost certainly go into recession early next year, as the combo of spending cuts and tax hikes will wipe out nearly 4 percentage points of economic growth in the first half of 2013, according to research by Goldman’s Alec Phillips, a political analyst and economist. Since most estimates project the economy will grow only about 3 percent next year, that puts the U.S. solidly in the red.
One can only wonder how it has come to pass that we think government spending is growing when it is not and that it is the cause of our problems when quite the opposite is true. Painful lessons lie ahead—if only we are able to learn them.