Christian E. Weller on the State of the Economy
The current budget negotiations need to find a growth-enhancing balance between spending and revenue changes that do not unduly burden middle-class families, writes Christian Weller.
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The debate over federal budget priorities has kept its momentum as Republicans are threatening not to raise the federal debt ceiling unless programs are aggressively cut back. Keeping the debt ceiling in place could lower growth and jeopardize job creation, while severe spending cuts could substantially reduce middle-class economic security. American families are only now starting to see a modest labor market recovery strengthening. The unemployment rate is dropping, household debt continues to decline, and financial distress shows signs of easing. These tentative gains could quickly evaporate if growth, job creation, and income gains slowed.
Policymakers have to secure the gains of the recovery while strengthening America’s middle class. This means maintaining consumption and investment growth in the short run and addressing trade and budget deficits in the medium term. The current budget negotiations thus need to find a growth-enhancing balance between spending and revenue changes that do not unduly burden middle-class families who have already suffered a lot from the economic fallout of the Great Recession.
1. The U.S. economy continues a moderate recovery. Gross domestic product, or GDP, grew at an annual rate of 1.8 percent in the first quarter of 2011, the seventh quarter of positive growth in a row. Consumption grew at an annual rate of 2.7 percent, and year-over-year business investment growth was 9 percent in the first quarter of 2011. Both consumption and investment slowed from their growth rates at the end of 2010 as the economy struggled with higher oil prices (see Figure 1).
2. The trade deficit stays high. The U.S. trade deficit stood at 3.8 percent of GDP in the first quarter of 2011, up from its last trough of 2.4 percent of GDP in the second quarter of 2009—the largest deficit since the end of 2008. U.S. export growth slowed to 4.9 percent in the first quarter of 2011, down from 8.6 percent, and U.S. import growth accelerated to 4.4 percent, up from -12.6 percent in the fourth quarter of 2010.
3. The labor market recovery slowly takes hold in the private sector. The U.S. economy continuously added private-sector jobs from February 2010 to April 2011 for a total of 2.1 million jobs. This included 268,000 new jobs in April 2011.
4. Unemployment stays high because of a massive jobs hole. There were still 7 million fewer jobs in April 2011 than at the start of the recession in December 2007 and the population has also grown since then, putting the labor market deeper into the hole than the raw number suggests. The unemployment rate has hence remained stubbornly high at 9 percent in April 2011.
5. Unemployment stays high among the most vulnerable. The African American unemployment rate in April 2011 rose to 16.1 percent, the Hispanic unemployment rate to 11.8 percent, and the unemployment rate for whites to 8 percent. Youth unemployment stood at a high 24.9 percent. And the unemployment rate for people without a high school diploma climbed to 14.6 percent, compared to 9.7 percent for those with a high school diploma and 4.5 percent for those with a college degree.
6. Rapidly rising oil prices threaten a fledgling recovery. A gallon of regular gasoline cost at least $3.96 through the first three weeks of May 2011. This is the highest gasoline price since July 2008 (see Figure 2).
7. Employer-provided health insurance benefits continue to disappear. The share of people with employer-provided health insurance dropped from 64.2 percent in 2000 to 55.8 percent in 2009. This is the lowest share since 1987 when the Census started to track these data.
8. Family incomes drop sharply in the recession. Median inflation-adjusted household income fell 3.6 percent in 2008 and by another 0.7 percent in 2009. It stood at $49,777 in 2009, its lowest level in inflation-adjusted dollars since 1997. White family income stood at $54,461, compared to African American family income, which was $32,584, or 59.8 percent of white income. Hispanic family income was $38,039 in 2009, or 69.8 percent of white income.
9. Poverty continues to rise. The poverty rate stood at 14.3 percent in 2009—its highest rate since 1994. The African American poverty rate was 25.8 percent, the Hispanic rate was 25.3 percent, and the white rate was 9.4 percent in 2009. The poverty rate for children under the age of 18 stood at 20.7 percent. More than one-third of African American children (35.7 percent) lived in poverty in 2009, compared to 11.9 percent of white children and 33.1 percent of Hispanic children.
10. Family wealth losses linger. Total family wealth was down $12.8 trillion (in 2010 dollars) from June 2007—its last peak—to December 2010, despite an increase of $6.6 trillion in 2010 dollars from March 2009—the lowest point during the recession. Home equity is also recovering but homeowners on average still own only 38.5 percent of their homes, with the rest owed to mortgage banks.
11. Debt levels are still high. Total household debt equaled 116.1 percent of after-tax income in December 2010. This is down from a record high of 130.2 percent in September 2007 but still higher than at any point before 2005.
12. Mortgage troubles stay high. One in eight mortgages is delinquent or in foreclosure. The share of mortgages that were delinquent was 8.2 percent in the fourth quarter of 2010, and the share of mortgages that were in foreclosure was 4.6 percent—the highest share on the Mortgage Bankers Association’s records, which date back to 1979 (see Figure 3).
13. Families feel the pressure. Credit card defaults amounted to a high 7.7 percent of all credit card debt by the fourth quarter of 2010—down 29.4 percent from its peak in the second quarter of 2010 but still 85.5 percent above the rate in the fourth quarter of 2007, just before the Great Recession started.
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Dr. Christian E. Weller is a Senior Fellow at American Progress.
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Christian E. Weller