The Economy Has Turned the Corner … Into a Dead End

• Employment growth has declined for the past consecutive months (figure 1).
• Employment gains in July were the lowest since December 2003 (figure 1).
• At this point, the economy still has 1.2 million fewer jobs than at the start of the recession in March 2001 (figure 2).
• If employment growth had kept pace with population growth in this recovery, there would have been 4.0 million more jobs in July (figure 2).
• If employment growth had kept pace with population growth since the recession, there would have been 6.9 million more jobs in July (figure 2).

• Even without taking inflation into account, this recovery has seen the slowest growth in weekly earnings of non-production supervisory workers, a good indicator of actual income of the majority of the American workforce (figure 3).
• Once inflation is accounted for, weekly earnings growth for the entire recovery is negative, a new record low (figure 3).
• Consequently, average monthly growth of total wages and salaries also reached a record low in this recovery, after inflation is accounted for (figure 3).

• Consumption growth, which was one of the most important components of the recovery so far, showed its slowest performance since the recession in the second quarter of 2004.
• Personal consumption expenditures declined by 0.9 percent in inflation-adjusted terms in June, the sharpest drop in almost three years (figure 4).
• Reflecting the emerging weakness in consumption is the fact that the retail sector lost 19,000 jobs in July.
• The economic boom was also sustained by a housing boom. However, household spending on new construction, including renovations, declined by 0.6 percent in June.

• Everywhere households look today, their costs are rising. The costs of housing – renting or owning a home – have gone up by 7.5 percent since the start of the recovery, health care costs by 11.8 percent, and energy costs by 34.1 percent.
• At the same time that prices are rising, mortgage rates are rising while households have already incurred record debt levels. Consequently, the debt service burden of households – the share of their disposable income dedicated to repaying their debt in each quarter – has been at or above 13 percent for the thirteen quarters ending in March 2004. This was the first time since the early 1980s that the debt service burden exceeded 13 percent.
• Interest rates are expected to rise further. In June 2004, the Federal Reserve raised its key interest rate for the first time in four years. And mortgage rates reached their highest level in almost two years in June 2004 (figure 5).

• Although not originally intended as an economic stimulus, the president has promoted his massive tax cuts as the primary mechanism that has helped the labor market. However, even when the economic recovery hit its strongest pace in the third quarter of 2003, less than 20 percent of that growth was attributable to the president’s tax cuts, according to economy.com.
• Many economists agree also that the large deficits created by the massive tax cuts of the past few years will likely slow down economic growth and living standards in the future.

• President Bush has either ignored or downplayed the economic weakness of the past few months. On July 31, he said, according to the New York Times, that "America has a strong economy, and we are growing stronger every day…This president and vice president are determined to keep moving forward with a comprehensive pro-jobs, pro-growth agenda." And on August 5, he was quoted in the Los Angles Times as saying, "listen, I understand something about the job base in Ohio…People are skittish. But there’s jobs being created."
• Instead of focusing on policies that could help to boost job creation or that could aid those still struggling in the labor market, the administration has focused on its new overtime regulations, scheduled to go into effect in the second half of August. According to the Economic Policy Institute, an estimated six million workers will lose overtime protections under the new regulations.
• Recently, President Bush has also indicated that he wants to weaken overtime pay even for those workers who still have it. The proposed regulations would make it easier for employers to force their employees to take time off instead of giving them their required overtime pay.
• The White House continues to promote making the president’s tax cuts permanent as its top priority to keep the economy moving forward. Such a policy will widen the nation’s deficit without adding significant stimulus to the economy and the labor market, as the experience of the past few years has shown.

1. The monthly percent changes in employment reached their highest point during this recovery in March 2004. Since then, employment growth has continuously slowed. Employment growth in July 2004 was the lowest in all of 2004. (Figure 1)
   Source: Bureau of Labor Statistics, Payroll Employment, www.bls.gov.
2. Total payroll employment in July 2004 was still 1.2 million jobs less than at the beginning of the recovery. If job growth had kept pace with population growth since the start of the recovery in November 2001, there would have been four million more jobs, and if employment growth had kept pace with population growth since the start of the recession in 2001, there would have been 6.9 million more jobs in July 2001. (Figure 2)
   Source: Bureau of Labor Statistics, Payroll Employment, www.bls.gov, and author’s calculations.
3. During this recovery, wages grew particularly slow. Nominal and real weekly earnings show the slowest gains in any recovery since the early 1960s – the earliest for which data are available. Combined with slow employment growth, this was also the recovery with the slowest growth in total salary and wage payments. (Figure 3)
   Sources: Bureau of Labor Statistics, Weekly Earnings of Non-Supervisory Production Workers, www.bls.gov, Bureau of Labor Statistics, Consumer Price Index, www.bls.gov, Bureau of Economic Analysis, Personal Income and Its Disposition, www.bea.gov, and author’s calculations.
4. Consumption growth has been a major force propelling growth forward. In June 2004, consumption saw its largest decline in almost three years, raising worries about the sustainability of the strength of the recovery. (Figure 4)
   Source: Bureau of Economic Analysis, Personal Income and Its Disposition, www.bea.gov.
5. An important aspect of this recovery has been a refinancing boom based on low mortgage rates. Since April 2004, mortgage rates have been rising again, thereby raising worries about a possible end of the refinancing boom and the sustainability of the recovery. (Figure 5)
   Source: Board of Governors of the Federal Reserve System, Release H.15 Selected Interest Rates, www.federalreserve.gov.

Christian E. Weller is a senior economist at the Center for American Progress.