Our Fragile Economy Still Needs Time to Gather Its Strength

We feel better, but nowhere near good.

A protestor holds a sign during a demonstration against unemployment benefit cuts on July 11, 2012 in Oakland, California. Dozens of protestors with the group Union of Unemployed Workers staged a demonstration to protest cuts in unemployment benefits.
National Journal
Charlie Cook
May 12, 2014, 3:35 p.m.

The best thing about long air­line flights is the time they of­fer for delving in­to long re­ports, un­in­ter­rup­ted by phone calls and emails. This in­cludes re­ports from eco­nom­ic de­part­ments of in­vest­ment houses — eco­nom­ic con­sult­ing firms and groups that ad­vise in­sti­tu­tion­al in­vestors — that give a tex­ture to what is go­ing on in the eco­nomy that can shape pub­lic opin­ion. One of my fa­vor­ite lines about polit­ics is from Yale polit­ic­al sci­ent­ist and stat­ist­i­cian Ed­ward Tufte in his book Polit­ic­al Con­trol of the Eco­nomy: “When you think eco­nom­ics, think elec­tions; when you think elec­tions, think eco­nom­ics.”

Amer­ic­ans re­main pretty pess­im­ist­ic about the eco­nomy. The Na­tion­al Bur­eau of Eco­nom­ic Re­search cal­cu­lates that the most re­cent re­ces­sion began in Decem­ber 2007 and ended in June 2009. But that is cer­tainly news to most Amer­ic­ans. In a March NBC News/Wall Street Journ­al poll, 57 per­cent of re­spond­ents said they be­lieve we are still in a re­ces­sion, while 41 per­cent said we are not. In­deed, in the sev­en times that NBC/WSJ poll­sters have asked the ques­tion since the lat­ter half of 2001, a ma­jor­ity of Amer­ic­ans have felt that we were in a re­ces­sion.

While con­sumer con­fid­ence is on the rise and pretty close to the highest it has been since the last re­ces­sion began, we are nowhere near the levels of op­tim­ism and com­fort that Amer­ic­ans felt dur­ing the peri­od of 1992 un­til this latest re­ces­sion began in late 2007. We feel bet­ter, but nowhere near good. The re­cent eco­nom­ic re­ports that we only had a one-tenth of a per­cent­age point in­crease in the real gross do­mest­ic product is at­trib­uted to an un­usu­ally harsh winter; but a vi­brant eco­nomy doesn’t sus­tain that kind of hit from a tough winter alone. As Mesirow Fin­an­cial’s Chief Eco­nom­ist Di­ane Swonk put it in a re­cent re­port to cli­ents: “The eco­nomy came to a vir­tu­al stand­still in the first quarter [of 2014], adding in­sult to in­jury to an eco­nomy still strug­gling to re­cov­er.” She ad­ded that it was “re­flect­ive of a fun­da­ment­al weak­en­ing in a re­cov­ery that was already com­prom­ised.” This was and re­mains a very fra­gile eco­nomy.

The monthly sur­vey of top eco­nom­ists con­duc­ted by Blue Chip Eco­nom­ic In­dic­at­ors pro­jects that the eco­nomy, as meas­ured by change in real GDP, will likely grow at a rate of 3.4 per­cent for the on­go­ing second quarter of this year, then 3.0 and 3.1 per­cent for the third and fourth quar­ters, re­spect­ively. And pro­jec­tions for 2015 re­main ba­sic­ally at the 3.0 per­cent level. Ob­vi­ously, this is far bet­ter growth than we have had dur­ing re­ces­sions; look­ing back over the last three-quar­ters of a cen­tury, mid-to-high single di­gits is more the norm, so the eco­nomy will likely be grow­ing — but com­pared with the pain we have gone through, not at nearly the rate we need and would like to have.

With pro­jec­tions call­ing for growth — but noth­ing like the im­press­ive growth we have seen in pre­vi­ous eras — busi­nesses are slow to risk huge in­vest­ments in new plants and equip­ment. To para­phrase eco­nom­ist Mi­chael Drury of McVean Trad­ing and In­vest­ments, without a surge in cap­it­al spend­ing — which is not hap­pen­ing — this eco­nom­ic cycle will re­main lackluster, but last longer. Man­u­fac­tur­ing and em­ploy­ment in that sec­tor is pick­ing up strongly, but cau­tion re­mains.

Corner­stone Macro, a New York-based firm that ad­vises its Wall Street cli­ents on eco­nom­ics, policy, and in­vest­ment strategy, said in a re­cent re­port that the man­u­fac­tur­ing work­week is near a re­cord high, and man­u­fac­tur­ing wages are now on the in­crease after a stom­ach-churn­ing plunge dur­ing the 2008 re­ces­sion. The man­u­fac­tur­ing em­ploy­ment rate for April was 5.6 per­cent, the largest in­crease in al­most 30 years. Cit­ing fig­ures from the payroll firm ADP, the em­ploy­ment rate for small busi­nesses — or­gan­iz­a­tions with few­er than 50 work­ers — is at a re­cord high. Now al­most 50 mil­lion people work for small busi­nesses, al­most double those work­ing for large busi­nesses of 500 or more em­ploy­ees.

Hir­ing num­bers for small, me­di­um, and large firms are do­ing well, but not all of the un­em­ployed have the skills for this new eco­nomy. The labor-par­ti­cip­a­tion rate (the per­cent­age of the pop­u­la­tion work­ing) is still lan­guish­ing, and long-term un­em­ploy­ment re­mains a crit­ic­al prob­lem. Sadly, the longer people are un­em­ployed, the more their skills and mar­ket­ab­il­ity at­rophy, and the harder it is for them to find a new job. We were in a pretty deep hole dur­ing the re­ces­sion, fol­lowed by an ex­ceed­ingly slug­gish re­cov­ery.

Much of the good news in man­u­fac­tur­ing is linked to the en­ergy renais­sance com­ing from the oil and gas sec­tor. The In­ter­na­tion­al En­ergy Agency pro­jects that the U.S. will sur­pass Rus­sia and Saudi Ar­a­bia to be­come the world’s top oil pro­du­cer by 2015.

En­ergy In­form­a­tion Ad­min­is­tra­tion fig­ures show that U.S. crude-oil in­vent­or­ies are the highest since 1931, cur­rently at al­most 400 mil­lion bar­rels. This is roughly a third more than 10 years ago, and far great­er than the 250 mil­lion dur­ing the en­ergy crisis of the 1970’s. U.S. oil pro­duc­tion is now at double the amount of oil we im­port from OPEC, a huge plus for the United States for both eco­nom­ic and geo­pol­it­ic­al reas­ons. Head­ing in­to the re­ces­sion that began in Decem­ber 2007, im­ports far out­stripped pro­duc­tion.

The bot­tom line is that while there is con­sid­er­able good news, the bad news was so bad for so long, we need much bet­ter news for a much longer peri­od of time.

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