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Economic Snapshot: May 2012

Christian E. Weller on the State of the Economy

SOURCE: AP/Seth Perlman

Construction workers finish up on a new home seen for sale in Springfield, Illinois. Americans bought more new homes in April, the latest signal that the U.S. housing market is steadily improving.

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Families’ economic security is slowly improving: The labor market is adding jobs and household wealth is gradually increasing. But families continue to struggle given the depth of the past recession and the slow pace of improvements during the economic recovery.

Policymakers acted decisively in the past with extended unemployment insurance benefits, payroll tax cuts, and infrastructure investments when they felt a sense of urgency about helping America’s middle class. But they should still feel that sense of urgency since comparatively high unemployment rates—especially among vulnerable population groups—high poverty rates, a depressed housing market, and large household debt burdens have put America’s middle class in an unacceptably insecure position.

Making them more secure will take comprehensive and targeted policy. Sustained and faster job creation should be policymakers’ top concern, especially for vulnerable groups such as African Americans, young labor force participants, and people without a high school degree. Also required are income supports through, for instance, extended unemployment insurance benefits, higher minimum wages, and more opportunities for employees to join a union.

Policymakers also need to focus on helping households build wealth faster through measures to strengthen the housing market, help households save more money, and allow families to lower their debt burden even more than in the past.

1. Economic growth remains positive but modest. Gross domestic product, or GDP, grew at an annual rate of 2.2 percent in the first quarter of 2012. Government spending actually fell by 3 percent, and business investment declined by 2.1 percent in the first quarter of 2012, while consumption grew by 2.9 percent, and exports expanded at a reasonable 5.4 percent growth rate. Cutbacks in government spending reflect the continued fiscal crisis among federal, state, and local governments and declining business investment. The drop-off in business investment may be only temporary, however, since it reflects in large measure a slowdown of the very rapid expansion in the mining sector.

2. Competitiveness falls back. Worker productivity—the amount of goods and services produced in an hour of work in the nonfarm business economy—is a key measure of the economy’s global competitiveness. It decreased by 0.5 percent in the first quarter of 2012. Productivity now stands 6.9 percent larger than it was in December 2007, at the start of the Great Recession, but is well below the average increase of 9.3 percent for similar periods in the past.

3. The labor market recovery continues. The economy has continuously added jobs since October 2010 and had 2.5 million more jobs in April 2012 than it did in June 2009, when the economic recovery started. The private sector added 3.1 million jobs during this period. The difference between the net employment gain and private-sector gain is explained by the loss of 607,000 state and local government jobs, as budget cuts reduced the number of teachers, bus drivers, fire fighters, and police officers, among others. Job creation is a top policy priority since private-sector job growth is still too weak to quickly overcome other job losses and to rapidly improve the economic fortunes of America’s middle class.

Share of long-term unemployment, business-cycle averages

4. Unemployment stays high. The unemployment rate stood at 8.1 percent in April 2012. Long-term unemployment is also still a problem: It ballooned in recent years as the unemployment rate stayed elevated. In April 2012, 41.3 percent of the unemployed were out of work and had been looking for a job for more than six months. The average length of unemployment stayed high, with 39.1 weeks in April 2012. The long-term unemployed are still struggling even as private-sector job creation proceeds apace since millions of unemployed workers vie for the newly created jobs.

5. Labor market pressures fall especially on communities of color, young workers, and those with less education. The African American unemployment rate in April 2012 stayed well above average at 13 percent, the Hispanic unemployment rate was 10.3 percent, and the white unemployment rate was 7.4 percent. Youth unemployment stood at a high 24.9 percent. And the unemployment rate for people without a high school diploma stayed high with 12.5 percent, compared to 7.9 percent for those with a high school diploma, 7.6 percent for those with some college education, and 4 percent for those with a college degree. Vulnerable groups have struggled disproportionately more amid the weak labor market than do white workers, older workers, and workers with more education. But even those groups that fare better than their counterparts in the weak labor market suffer tremendously from high unemployment.

6. Household incomes continue to drop amid prolonged labor market weaknesses. Median inflation-adjusted household income—where half of all households has more and the other half has less—stood at $49,445 in 2010, its lowest level in inflation-adjusted dollars since 1996. It fell again by 2.3 percent in 2010, an accelerated decline after median income dropped by 0.7 percent in 2009. American families saw few gains during the recovery before the crisis hit in 2008 and experienced no income gains during the current economic recovery after 2009.

7. Income inequality on the rise. Households at the 95th percentile with incomes of $180,810 in 2010 had incomes that were more than nine times—9.04 times, to be exact—the incomes of households at the 20th percentile with incomes of $20,000. This is the largest gap between the top 5 percent and the bottom 20 percent of households since the U.S. Census Bureau started keeping record in 1967.

8. Poverty continues to rise across a wide spectrum. The poverty rate rose to 15.1 percent in 2010—its highest rate since 1993. The African American poverty rate was 27.4 percent, the Hispanic rate was 26.6 percent, and the white rate was 9.9 percent in 2010. The poverty rate for children under the age of 18 stood at 22 percent. More than one-third of African American children (39.1 percent) lived in poverty in 2010, compared to 35 percent of Hispanic children and 12.4 percent of white children. The prolonged economic slump, following an exceptionally weak labor market before the crisis, has taken a massive toll on the most vulnerable.

9. Employer-sponsored benefits disappear. The share of people with employer-sponsored health insurance dropped from 59.8 percent in 2007 to 55.3 percent in 2010. The share of private-sector workers who participated in a retirement plan at work fell to 39.5 percent in 2010, down from 42 percent in 2007. Families have less economic security than in the past due to fewer employment-based benefits, requiring more private savings to make up the difference.

Household debt to after-tax income, 1952 to 2011

10. Family wealth losses linger. Total family wealth is down $14.4 trillion (in 2011 dollars) from June 2007—its last peak—to December 2011. Home equity stays low, such that homeowners on average own only 38.4 percent of their homes, with the rest owed to banks. Households, already struggling with low incomes in a weak labor market, consequently feel growing pressures to save more and consume less. The dual burden of low income and decimated household wealth puts the brakes on consumer spending, holding back economic and job growth.

11. Household debt is still high. Household debt equaled 112.8 percent of after-tax income in December 2011, down from a peak of 130.2 percent in September 2007 but still higher than at any point before March 2004. The unprecedented fall in debt over the past four years resulted from several factors—tight lending standards, falling interest rates, and massive foreclosures—that are unlikely to continue. Further deleveraging will likely slow, then, unless incomes rise faster than they have in the past. High debt will hence continue to slow economic growth as households focus on saving rather than on spending more.

Share of mortgages that are deliquent or in foreclosure

12. The housing market improves slowly. New home sales in April increased by 11,000 to 343,000, and the median house price in April 2012 was 4.9 percent higher than a year earlier. Existing home sales were up by 10 percent in April 2012 from a year earlier, and the median price for existing homes was up by 10.1 percent during this period. The housing market is improving from very low levels in the spring of 2012.

13. Financial distress is widespread among families. One in eight mortgages is still delinquent or in foreclosure even though mortgage troubles have gradually eased since March 2010. The share of mortgages that were delinquent was 7.4 percent in the first quarter of 2012, and the share of mortgages that were in foreclosure was 4.4 percent at the same time. High unemployment coupled with massive wealth losses has pushed many families to delay or even default on mortgage payments. Household economic distress reverberates across the economy, as banks are nervous about extending new mortgages, which prolongs the economic slump.

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This is part of a regular column: Economic Snapshot

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