The modern economy isn't behaving as it should.
One of the most reported pieces of economic news from this past decade has been the sluggish recovery from 2008's Great Recession. Ordinarily an economy in the wake of recession bounces back and posts gains that make up the ground lost in terms of economic growth and consumer spending. This has not happened. Instead, the years since 2009's official recovery have been marked by a famously weak economy by historic standards.
The stock market has regained the value it lost in the subprime mortgage collapse, but across the country, many Americans insist that they don't feel those gains.
And the evidence isn't just anecdotal. In fact, despite the headline statistics, America's economic indicators fluctuate wildly in general. Formerly reliable relationships between data don't seem to work anymore, and big picture forces seem to influence spending and hiring in ways that economists still don't fully understand. The economy is acting very weirdly right now, and here are ten specific reasons why.
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Alongside the unemployment rate is a statistic called the labor force participation rate. It measures the percent of adults who have or are currently looking for a job. During the Great Recession it collapsed, a trend generally ascribed to people who gave up on getting work when opportunities got scarce.
That much is normal; it isn't unusual for workers to get discouraged and drop out of the labor force during times of stubbornly high unemployment. However since then, hiring has picked back up, but the labor force participation rate hasn't.
No one can quite explain why.
Although theories include the aging population of Baby Boomers and increasing length of higher education, as the Brookings Institute points out in the study linked above, that doesn't explain the entire phenomenon. Many of the missing workers are men in their prime working years and economists haven't yet figured out why.
There are, in short, concerns that unemployment has stayed too low for too long.
Much of this worry comes from simple timing. Economies are cyclical entities, and contractions tend to happen every five years or so. This isn't a rule, just a historical pattern, yet it's a common enough one that economists and analysts believe that the length of the current U.S. expansion may soon become untenable.
America's job market has done well in the years since the Great Recession, but it has been almost ten years since the stock market collapse. For some people that's reason enough to believe that the next recession might be right around the corner.
Inflation should be higher.
With low Federal Reserve interest rates and high employment, inflation could have set in across the U.S. economy years ago. It hasn't. Despite very few quarterly exceptions it has remained below the Federal Reserve's goal of 2% for years.
That's a problem, because inflation both has positive direct effects and indicates a growing economy. A low inflation rate means that the wage/hiring/price cycle hasn't kicked in yet across the country, a feedback loop which drives prices up as workers get wealthier. That could indicate many possible structural issues, but more than anything else economists worry about the fact that workers don't have enough spending money to kick start inflation.
Low unemployment should have many benefits for both job seekers and workers alike, most notably that it forces employers to compete more aggressively for qualified applicants.
America hasn't just enjoyed strong employment; for years, it has remained at or near full employment (defined by the Federal Reserve as approximately 5.0% to 5.2% unemployment). Employers complain that they struggle to find workers with appropriate skills, which makes sense when a labor market has too few people for the jobs available. This should cause a corresponding uptick in wages and benefits as companies compete for that increasingly rare (and therefore valuable talent).
The trouble is, that competition doesn't appear to be happening. Although hiring remains strong, with some exceptions wages haven't kept up. Employers haven't increased pay or benefits, and there's little indication that hours have even decreased. The labor market remains tight, but no one seems all that eager to compete in it.
Another major indicator that tends to fly under the radar is the quit rate, a measure of how many people voluntarily leave their jobs each month. It's a powerful reflection of how workers feel since the rate tends to fluctuate in direct correlation with labor market confidence. Although it bottomed out during the Great Recession, in the years since it has gradually climbed back up. By now the quit rate has returned to where it was before the economy crashed.
That's not how people tend to feel, though.
Whether reflected by the Consumer Confidence Index, the University of Michigan's Survey of Consumers or simply anecdotal experience, American workers still don't say they feel good about the state of the labor market.
American workers are acting like they feel good about their job prospects while insisting that they don't.
During the economic crisis the Federal Reserve plunged its benchmark interest rate all the way down to zero percent. In recent years it has raised that rate slowly and slightly, to its current rate of 1%. By way of comparison, in 2007 that interest rate was over 5%.
The purpose of the Federal Reserve's low interest rate project was and still is to encourage spending by making it very cheap for businesses to get money. Historically that has worked fairly well, as banks, borrowers and companies respond to an opportunity to borrow at excellent interest rates.
Right now, it's not. While interest rates have almost certainly helped the economy recover since the Great Recession, growth hasn't responded the way it should. Interest rates remain low, but borrowing and spending haven't picked up as they should.
Americans owe more money than ever before in history.
Between credit cards, home loans, student loans and auto loans, Americans owe $12.8 trillion in household consumer debt. This amounts to 67% of the Gross Domestic Product. Of that, student loans account for $1.45 trillion alone.
Household debt can have paradoxical and fluctuating effects on the national economy. Under certain conditions, or to a certain extent, it can spur consumer spending and demand-driven economic growth. However at the same time debt can also act as a drag on the economy, depressing demand as people spend their money servicing principal and interest.
Household debt has a powerful distorting effect on consumer spending and demand, and it's at an all-time high.
In 2014, Thomas Piketty got famous for his work on the economic impact of inequality, Capital in the Twenty First Century, in which he found that rising inequality has profound distorting effects on a national economy. Other researchers have published similar results, arguing that rising inequality pushes down economic growth and makes the labor market weaker.
Concentrating wealth in fewer hands can reduce consumer demand and cut investment in areas such as education and infrastructure. It can collapse spending as inflation grows faster than incomes, an effect magnified in a society which has as much household debt as the U.S. It can even create distortions in investment markets, once again driven by concentration of money away from a distributed base with distributed interests, opportunities and appetites for risk.
Income inequality in the U.S. is the highest it's been since the Great Depression, and that disparity keeps growing with every year. Many economists believe that this has a lot to do with the ongoing sluggish recovery from the Great Recession.
One of the great projects of modern economic policy is figuring out how to encourage greater corporate spending. The project has launched think pieces, government policy and even tax reform, all aimed at trying to convince companies to spend and invest more money.
So far, it hasn't worked.
As noted above, part of this mystery is that companies haven't borrowed much despite historically cheap access to cash. Just as big a deal, though, is the amount of capital already controlled by large companies. From Apple and Google to General Motors, they're sitting on piles of cash the size of small nations… and choosing not to spend or invest with it.
Why that is remains a subject for debate. In theory spending money to make money should be the whole purpose of a business enterprise, so why aren't companies like General Motors taking their vast capital and opening new plants? No one precisely knows.
If there's one thing that politicians have focused on over the past year, it's economic growth. In particular, the Republican majority in Congress and the White House has promised strong growth projections of anywhere from 3% to 6% per year. This would be both an improvement and an accomplishment because, the most recent quarter notwithstanding, America's growth hasn't just slipped… it has almost collapsed.
Growth, as measured by GDP output, measures how much more of everything a country produces from one year to another. It's how a country grows richer and thus provides a better standard of living across the board. As economists often describe it, economic growth is how members of a society stop competing for bigger slices of the pie and start working towards a bigger pie for all.
What Americans generally think of as a normal standard of living requires a growth rate of around 2%. In recent years the GDP has struggled to even approach that, often hovering at or below 1%. Economists have raised theories to explain this that range from inequality to student debt. Some even suggest that permanent, structural forces are pushing down the economy. Whatever the cause, it may be the single most important macroeconomic factor at work today.
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