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10 Reasons the Economy Isn't as Good as It Seems

10 Reasons the Economy Isn't as Good as It Seems

(Dollar Photo Club)

By    |   Sunday, 28 August 2016 07:07 AM


In a late July 2015 interview with departing "Daily Show" host Jon Stewart, President Obama claimed, "The economy, by every metric, is better than when I came into office."

Though its wording was a bit stronger than his past statements on the economy, Obama has been making some variation of this "the economy got better under my watch" claim since the 2012 presidential campaign. Does his confidence square with reality?

Not really. Politifact's Truth-o-Meter ruled Obama's "Daily Show" claim "Mostly False."

According to Politifact, falling unemployment, consistent job growth, and rising per-capita gross domestic product fail to offset a host of less-rosy metrics indicating that the economy is actively deteriorating on many fronts, such as historically low labor force participation and high long-term unemployment rates.

Not surprisingly, 57% of respondents in a 2014 NBC News-Wall Street Journal poll falsely believed that the United States remained in recession. Turns out Americans are deeply skeptical of the Obama economy.

Here are 10 objective reasons the American economy isn't as strong as it seems.

1. Historically Low Labor Force Participation

According to the Brookings Institution's jobs gap calculator, the American jobs deficit bottomed at more than 10 million in early 2010 and has risen steadily ever since. That would be great news were it supported by other big-picture labor force measures.

Troublingly, one of the most important measures of working America's strength - labor force participation - has been on the decline for years and shows no real signs of stabilizing.

Labor force participation measures the proportion of employed or unemployed (actively seeking work) individuals against the total population of working-age, non-disabled people. According to the Federal Reserve Bank of St. Louis, the labor force participation rate declined from a long-term high of 67.3% in early 2000 to 62.4% in October 2015. This is lower than at any point since the late 1970s.

While some of the decline in labor force participation is due to Baby Boomers retiring voluntarily before they age out of the labor force, much of it is attributable to a sluggish recovery that penalizes older (but not yet ready to retire) workers and those without college degrees, millions of whom were laid off by downsizing manufacturers before and during the Great Recession. In other words, many people who can't find jobs are choosing to stop looking for work - and thus stop participating in the American labor market - rather than accept lower-paying jobs or hunt fruitlessly for increasingly scarce manufacturing jobs.

2. Persistent Underemployment

In early 2010, the U.S. unemployment rate - measuring out-of-work labor force participants actively seeking employment - peaked just north of 10%. It has fallen slowly but steadily ever since, and now sits near 5%, a level the Center for Economic Policy Research finds nearly consistent with full employment.

However, many economists argue that traditional measures of unemployment understate labor force utilization. They point to a more expansive metric known as U-6. In addition to traditionally unemployed workers, U-6 measures the rate of workers employed part-time for economic reasons - workers who want and need, but can't find, full-time work in a field relevant to their skills or education. It also measures marginally attached workers, defined as individuals who looked for work within the past 12 months, but have since given up the search.

According to the Congressional Budget Office, the U-6 measure peaked above 16% at the height of the great recession. It remains above 12%, more than twice the current unemployment rate. While many U-6 workers do earn regular paychecks, they don't fully realize their earning potential. Workers who earn less spend and invest less, so that's a major damper on U.S. economic performance.

3. High Rates of Long-Term Unemployment

This is another sobering labor force metric. Despite marked improvement in the headline unemployment rate, long-term unemployment - the proportion of workers who've been out of jobs for 27 consecutive weeks or longer - remains well above historical averages.

According to the Congressional Budget Office, the long-term unemployment rate peaked above 4% in early 2010, when it accounted for about 40% of total unemployment. It's now around 2%, or slightly less than 40% of total unemployment. But long-term unemployment remains above levels reached at any point between 1994 and 2007.

The long-term unemployment problem is particularly acute in the manufacturing sector, where millions of workers laid off in the Great Recession struggle to find work at increasingly lean, high-tech U.S. manufacturing firms. It's also a major issue for older workers, for whom age discrimination (despite age being a protected class under U.S. labor law) is the biggest threat. Since hiring managers tend to avoid candidates with long employment history gaps, these workers face a painful conundrum: They can't get a job because they've been out of work too long.

Over time, long-term unemployment contributes to depressed labor force participation rates as discouraged workers simply stop looking for jobs and retire early, return to school, or apply for disability assistance. And the loss of these labor force dropouts' accumulated skills and experience - their human capital - causes incalculable economic harm.

4. Sluggish Wage Growth

The Federal Government's October 2015 jobs report was widely regarded as the year's strongest because it indicated a modest but undeniable uptick in median hourly wages.

However, one month does not make a trend. Prior to October, U.S. wage growth had languished for years. As it debunked Obama's economic success claims, Politifact noted that inflation-adjusted median weekly earnings fell by about 1% from 2009 to 2015.

During the same period, inflation-adjusted median household earnings fell by about 4%. These figures aren't exactly consistent with economic good times.

5. Rising Poverty & Expanding Government Assistance Rolls

According to the Census Bureau, the U.S. poverty rate rose by more than a full percentage point from the official end of the Great Recession, in 2009, to mid-2014. Although poverty stats often lag GDP growth figures, there's no historical precedent for such a rise in the poverty rate so long after the end of a painful recession.

Like decreases in median earnings, increases in poverty rates indicate underlying economic weakness. Since families living in poverty generally rely on government programs - Medicaid, WIC, SNAP (food stamps), and others - to remain healthy and solvent, elevated poverty rates strain federal, state, and local government budgets as well. According to a 2015 report from the U.S. Department of Agriculture, which oversees the federal food stamp program, food stamp utilization increased 39% between 2009 and 2014.

6. Collapsing Oil & Commodity Prices

Because it lowers the cost of production and transportation, leaving more money in consumers' and businesses' pockets, cheap energy is often touted as an economic boon. But low oil and gas prices spell trouble for thousands of businesses and millions of workers whose livelihoods depend on the American oil and gas industry.

Thanks to a production glut attributable to the fracking boom, natural gas prices have been low for years. The American gas industry has adjusted to this semi-permanent reality.

Oil prices, however, have fallen precipitously since the summer of 2014 - dropping from around $90 per barrel, where they'd remained for much of 2013 and 2014, to about $40 per barrel by July 2015, per CNBC.

The speed of the decline took many market observers by surprise and threw the energy sector into chaos. Much of the American energy industry's growth had occurred in the Plains states' rich shale deposits, where smaller producers happily invested $50 or $60 for every barrel they pulled out of the ground, on the expectation that they'd be able to sell at a comfortable profit. When prices dropped below this break-even point, thousands of roughnecks, oilfield support personnel, equipment manufacturer employees, truck drivers, and adjacent service providers lost their jobs almost overnight.

Even as it weakened authoritarian petrostates like Russia (indirectly promoting global instability - more on that later), this shakeup removed a key pillar of support for the U.S. economy. Worse, lower energy prices - namely, lower auto and heating fuel costs - haven't dramatically boosted consumer spending, as is usually the case. Rather than spending the windfall, U.S. consumers are paying down debt or saving for a rainy day.

7. Weak Retail Sales Figures

Recent retail sales figures starkly illustrate the American consumer's apparent malaise.

According to Trading Economics, U.S. retail sales have either flatlined or increased slightly on a month-to-month basis since the oil price collapse.

Previous oil price drops, notably in the wake of the late-2000s financial crisis, were accompanied by strong retail sales growth. It's not clear why this time is different, but it's not great news for the economy - two-thirds of which is directly or indirectly attributable to consumer spending.

8. Strong Dollar & Weak Euro

The U.S. dollar, which has a strong inverse correlation with oil prices, is stronger than it has been in years. This is great news for Americans traveling abroad - it's cheaper to convert dollars to pounds, euros, yen, and other currencies than at any time since the Great Recession.

The dollar has gained particular strength in relation to the euro. Per CNBC, one euro bought nearly $1.40 as recently as May 2014. Today, one euro is worth between $1.00 and $1.10. That's a sharp 18-month change for a relatively stable, developed-world currency pairing.

However, the strong dollar's tourism benefits are far outweighed by its negative effects on U.S. manufacturers. When the dollar is strong, it costs more for foreign consumers to buy products made in the United States - and they're thus more likely to turn to cheaper items produced elsewhere, even if the quality is inferior. By the same token, a strong dollar makes imported products cheaper for American consumers to purchase, increasing U.S. manufacturers' competition in their home market.

9. Global Economic Weakness

Economists and market-watchers have taken to saying that the United States' economy is "the best house in a bad neighborhood." The country continues to manage a real annual GDP growth rate north of 2%, though it's an open question how long that pace can keep up.

Emerging markets like Brazil and Russia, whose economies weathered the Great Recession relatively unscathed, have been hammered by falling commodity prices (notably oil, iron, and copper). The Russian economy officially entered recession in Q1 2015 and posted truly abysmal GDP growth figures - minus 4.6% - in Q2, per Bloomberg Business. If oil prices remain low, further pain is likely in Russia and other resource-dependent countries - including friendlies such as Canada and Australia.

Meanwhile, the Eurozone is growing sluggishly, with GDP expanding by 1.2% between Q2 2014 and Q2 2015, according to Business Insider UK. That's not enough to make up for the region's terrible performance in the aftermath of the Great Recession, when a governance and currency crisis threatened to upend the entire European Union project. The region's two largest economies, France and Germany, are struggling mightily (though a weaker euro is likely to support German manufacturers going forward).

And China, now the world's second-largest economy in real terms, is the biggest wild card. China's communist leaders, who exercise far more economic influence than American policymakers, recognize that the country's days of exponential manufacturing growth are behind it. This is largely because the flow of desperately poor rural migrants to industrialized coastal cities has dried up, and because new labor regulations have raised the cost of running large-scale manufacturing operations in heavily populated areas.

China's leaders are thus embarking on an ambitious and treacherous plan to transform China's manufacturing-intensive economy into a consumer-driven economy that more closely resembles that of the United States. Such a seismic shift has never been successfully executed in a command-and-control economy, and even the most optimistic observers expect the transition to take a decade or more.

As consumers gain sway and manufacturers cease to expand, China's real GDP growth is all but certain to decelerate - though how fast and by how much is up for debate. Per Trending Economics, China's GDP growth has declined dramatically in the past two years, and the official 6.9% Q3 2015 rate is the lowest since the end of the Great Recession. Few objective economists completely trust the Chinese government's GDP figures, so real growth is likely even lower. If China isn't able to manage the transition to a slower-growing, consumer-driven economy - or if that transition results in widespread social unrest - then the ramifications for the U.S. economy could be enormous.

10. Global Political Instability & Security Issues

As the 2016 presidential campaign ramps up, global security issues are back at the forefront of the American political conversation. The contenders aren't holding back - earlier in the campaign, ABC News caught Ted Cruz telling a toddler that "the world is on fire." (Naturally, the little girl burst into tears.)

War, terrorism, disease, and political turmoil don't just take human lives and tear apart families. In an increasingly interconnected world, they also threaten American business interests.

U.S. airline stocks moved sharply lower during the late 2014 Ebola panic, and again after the November 2015 suspected bombing of a Russian passenger flight from Sharm-el-Sheikh, Egypt, to Saint Petersburg, Russia - even though no U.S. airlines directly serve Sharm. Hospitality and airline stocks retreated later that month after the Paris terror attacks paralyzed the heart of a major tourist destination. Companies of all types lose money during periodic Internet clampdowns by authoritarian regimes like Russia and China, and after data breaches by government-supported hackers.

The most troubling thing about global instability and insecurity is that perception often matters more than reality. By many measures, such as felony crime and violent death rates, the world is safer today than ever before. But global news coverage and social media bring every little bit of bad news into our homes and offices, reinforcing our collective perception of an unstable world spinning rapidly out of control.

Widespread fear that there's another shoe to drop - another terrorist attack, another disease outbreak, another violent coup or civil war - has a chilling effect on business investment, global logistics, travel patterns, and more. More than ever, the American economy is at the mercy of events that its participants can't control.

Final Thoughts

The rather mild recession that followed the dot-com bust lasted six months - April 2001 to October 2001. The Great Recession, which by many measures was the United States' most severe economic downturn since the 1930s and precipitated the near-collapse of the global financial system, lasted about a year and a half - December 2007 to June 2009.

More than six years have passed since the end of the Great Recession. That's longer than the interval between the dot-com bust recession and the start of the Great Recession. By many measures, the American economy still hasn't recovered its pre-financial crisis mojo.

The clock is ticking. By historical standards, we're actually overdue for another recession. With economic instability mounting elsewhere in the world, our tepid recovery might not last much longer. Will the United States suffer another downturn before it fully recovers from the last?
 

Andrew Schrage is the CEO and co-owner of MoneyCrashers.com, a financial education website. Schrage was educated at Brown University and after a stint at an investment fund in Chicago, he decided to branch out on to his own. The MoneyCrashers website is dedicated to helping people make better decisions as far as managing their money, and includes tips and helpful advice on ways to save cash, reduce credit card debt, investing for the future, and the importance of having an emergency fund, among a wide variety of other topics. The goal of Money Crashers is to assist people in bettering and advancing their financial lives.

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AndrewSchrage
More than six years have passed since the end of the Great Recession. That's longer than the interval between the dot-com bust recession and the start of the Great Recession. By many measures, the American economy still hasn't recovered its pre-financial crisis mojo.
economy, good, reason, bad
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2016-07-28
Sunday, 28 August 2016 07:07 AM
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