The American economy is better off today than it was three years ago. It could be much better off than it is. Indicators suggest that growth may be finally ready to take off from its post-recession bumps along the runway—but then again, that’s how the indicators looked this time last year.
As President Obama prepares to deliver his State of the Union address, 13 million people still want to find work but can’t. An additional 10 million aren’t working as many hours as they’d like to or have given up even looking for a job. Corporate profits have soared to nearly $2 trillion a year, a record high.
This is the true state of the union, economically. It is far more complicated than the state Obama is likely to describe in his speech on Tuesday, or that Indiana Gov. Mitch Daniels will likely present in the Republican response to the president. It is the state of a nation climbing slowly from the wreckage of the 2008 financial crisis, of renewed optimism creeping into some forecasts, of looming threats to the recovery from abroad, of policy blunders that have held growth back.
One way to sum up the economy right now is to say it appears set—finally—to fulfill the grand claims Obama made about it in his last two State of the Union speeches. “The worst of the storm has passed,” the president assured Congress and the nation in 2010. Last year, he extolled stock-market gains and profit levels and declared: “We are poised for progress…. The economy is growing again.”
Neither of those statements turned out to be exactly true in the year after Obama made it. In each case, Obama can blame himself, in part.
It’s true that the worst of the recession’s effects on the job market and business balance sheets are over. But individual incomes have stagnated since 2010, and the housing market has slid even further. Housing is the bête-noire of Obama economic policies; the administration has floundered in its efforts to battle a foreclosure backlog and plunging home prices, even as economists increasingly call housing the greatest drag on the recovery.
Even with the housing drag, though, analysts expected 2011 to bring a huge dose of the “progress” Obama promised on growth. An oil shock, a tsunami, and Europe’s reescalating debt crisis got in the way. The economy grew feebly in the first half of last year.
Obama and Congress teamed up to exacerbate the problems. The administration—overconfident in its rosy growth forecasts—waited until almost autumn to push for new measures to stimulate the sputtering economy. Congressional Republicans rattled the recovery further by unnerving markets and consumer confidence with their months-long brinksmanship over raising the federal borrowing limit. Democrats and Republicans made no serious effort to hash out a plan to tame America’s mounting debt.
If the administration had pushed through an aggressive and effective housing plan; if Capitol Hill bickering hadn’t drained confidence from investors; and if Obama and Republicans could have agreed on a medium-run plan to reduce debt, such as the one proposed by the bipartisan Simpson-Bowles commission, growth would likely be humming along today.
As it is, the economy is growing—and economists see reasons to believe it will continue to, despite continued pressures from Europe and the politically charged oil market.
Job creation has sped up, driving unemployment down to 8.4 percent. New jobless claims have fallen to their lowest levels in three years. Many economists expect hiring to accelerate even more, because companies have hit their limit on squeezing new production from existing resources.
“The economy has recovered to the point where additional workers are now necessary in order to achieve further output gains,” said Carl Riccadonna, senior U.S. economist at Deutsche Bank Securities, adding, “While employers were hesitant to hire workers or invest in capital to this point, the existing resources can only be stretched so far.”
Some economists express optimism that the housing market is, finally, bottoming out. Existing home sales are rebounding, though prices are still falling. Economists at Standard & Poor’s said last week that the housing market is “slowly brightening.” A survey this week of construction firms, which laid off 2 million workers as the housing bubble collapsed, revealed a surge in expected hiring in the industry this year.
Other indicators support increased growth to come. Indexes of manufacturing activity are climbing. Small-business credit appears to be thawing, which economists at High Frequency Economics predict will unleash a flurry of capital investment and job creation.
The chance remains that Greece could default on its debts, or Iran could block the Strait of Hormuz, in either case plunging the global economy back to recession. China’s slowing growth should concern Obama, especially given the U.S. economy’s increasing reliance on exports for growth. The worst of the storm appears to have passed, yes, but plenty of clouds remain on the horizon.
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