Several people have commented on my continuing bearishness or "gloom and doom" regarding the US economy.
I want to encourage this response. There is no point in having an interactive blog if a dissenting voice is silenced. In addition, dissent forces someone writing to defend his position. I liken this to defending a thesis in front of an academic panel. An idea that cannot withstand critical analysis does not deserve a place in public discourse.
As the points below illustrate there are serious flaws with the US economy. These are not minor points that can be rationalized away with a phrase akin to "nothing is perfect." Instead, the flaws below are fundamental problems which threaten the strength of the US economy.
Weak Job Growth.
Below are the beginning and ending dates for every economic expansion since 1961. I have not included the first expansion after 1981 because of the second contraction which occurred shortly after the end the first recession. In addition, I have included the beginning number of establishment jobs, the end number of establishment jobs, total jobs gained and the compound rate of establishment job growth for each expansion. The information comes from the Bureau of Labor Statistics website.
2/61 - 12/69
Beginning number of jobs: 53,556,000
Ending number of jobs: 71,240,000
Total Jobs Created: 17,684,000
Compound rate of establishment job growth: 3.283%
11/70 - 11/73
Beginning number of jobs: 70,409,000
Ending number of jobs: 77,909,000
Total Jobs Created: 7,500,000
Compound rate of establishment job growth: 3.43%
3/75 - 1/80
Beginning number of jobs: 76,649,000
Ending number of jobs: 90,800,000
Total Jobs Created: 14,151,000
Compound rate of establishment job growth: 3.56%
11/82 - 7/90
Beginning number of jobs: 88,770,000
Ending number of jobs: 109,773,000
Total Jobs Created: 21,003,000
Compound rate of establishment job growth: 2.8%
3/91 - 3/01
Beginning number of jobs: 108,542,000
Ending number of jobs: 132,504,000
Total Jobs Created: 23,962,000
Compound rate of establishment job growth: 2.01%
11/01 - ?
Beginning number of jobs: 130,883,000
Ending number of jobs: 135,230,000
Total Jobs Created: 4,347,000
Compound rate of establishment job growth: .71%
Notice there are two expansions of shorter duration that created 1.7 times and 3.2 times the number of establishment jobs as the recent expansion.
Because all of these expansions lasted various lengths of time, the compound rate of job growth is the best way to compare one expansion to another. Notice how the compound rate of job growth for this expansion is far lower than any other expansion since 1961? Whenever Bush has proposed tax cuts, he always argued the cuts would create jobs. Yet this hasn't happened with this expansion. The bottom line is Bush's record of job creation is the worst by far of any expansion in the last 40 years.
Weak Wage Growth
According to the National Bureau of Economic Analysis, this expansion started in November 2001 when according to the Bureau of Labor Statistic the average hourly pay of non-supervisory workers was $14.70. This figure was $16.62 in May of 2006 for an increase of 13.06%. Over the same period, the inflation gage according to the Bureau of Labor Statistics increased from 177.4 to 202.5, or an increase of 14.15%. Therefore, wages for non-supervisory employees have decreased a little over 1% since this expansion began.
However, the unemployment rate dropped below 5% in December 2005, signaling "full employment". Has the decrease in labor supply increased wages? No. In December 2005 the average hourly wage of non-supervisory employees was $16.35. In May that number was $16.62 for an increase of 1.65%. Over the same period, the overall inflation measure increased from 196.8 to 202.5 or an increase of 2.89%. Therefore, since the economy hit "full employment" wages have decreased 1.25%.
People aren't making any more money now than they were at the beginning of the expansion.
Debt Levels
Economists define savings as gross income less all expenses. The US savings rate was 2% at the beginning of this expansion and has been negative for nearly a year. Also remember that wages have been stagnant for the duration of this expansion. Since consumer spending is responsible for 70% of GDP growth, where does the new money for this expansion's consumer spending come from?
According to the Federal Reserve's Flow of Funds report, total household debt outstanding has increased from $7.568 trillion in the fourth quarter of 2001 to $11.840 trillion in the first quarter of 2006 for a total non-inflation adjusted increase of 56%. As a percentage of GDP, total household debt has increased from 74% of GDP in the first quarter of 2001 to 90%. The economy has expanded a GDP deflator adjusted 16.59% since November 2001. Over the same period, total consumer debt has increased a GDP deflator adjusted 45%.
In summary, there is almost as much debt in the US economy as total national product.
Federal Debt
Despite inheriting a budget surplus and a declining total debt/GDP ratio, the Bush administration has never balanced a budget and has returned to deficit spending. Bush's tax cuts have decreased government revenue from 19.8% of GDP in 2001 17.5% of GDP in 2005. Over the same time he has increased government outlays from 18.5% of GDP to 20.1% of GDP.
As a result, total Federal Debt outstanding has increased from $5.6 trillion in 2001 to $8.4 trillion currently. The total debt/GDP ratio has increased from 54% in 2001 to 64% currently. For the last 3 years, the US Treasury has issued over $550 billion of debt annually.
In short, Bush has made no progress on the federal deficit.
International Trade Deficit.
The balance on the US' current account was $341 billion in the first quarter of 2001 or 3.32% of total GDP. That number was $829 billion in the first quarter of 2006 or 6.25% of total US GDP. The trade deficit has increased for most of the last 5 years, with little sign of abating. Economists generally consider a 5% balance of trade/GDP ratio to be the danger level.
The balance of payments deficit simply means the US consumers more than it produces. At some point, foreign creditors will wonder if the US will ever pay its foreign debt off. When this happens, they will either demand a higher interest rate on US debt as compensation for the increased risk associated with US assets or sell the dollar. Either way, the US economy will be hurt. So long as the trade deficit remains at these levels, the US economy is in danger from extraneous outside economic events.
Conclusion
Summing up all of these points, jobs growth is weak and pay is stagnant. At the individual, federal and international levels, the US is relying on unsafe levels of debt to finance its collective lifestyle. None of these developments is healthy. Collectively, they add up to a fundamentally imbalanced economy that is vulnerable to a very painful correction.