The new year has begun with a dimmed outlook for the economy. The crisis in the housing and mortgage markets has translated into massive foreclosures and a much weaker labor market. These weak spots are further exacerbated by continually large budget and trade deficits. In this weak economic environment, we run the danger that policymakers will not take the large steps necessary to put the economy back on track for strong, stable, and equitably shared growth.
1. Wage growth is low. Factoring in inflation, hourly wages were 2.3% higher and weekly wages were 1.5% higher in November 2007 than in March 2001. Real hourly and weekly wages had fallen by -0.8% over the past 12 months.
2. Job growth weakens substantially. Monthly job growth since March 2001 has averaged an annualized 0.7%. In 2007, the average monthly job growth was 111,000 jobs, compared to 188,600 in 2006, and 211,800 in 2005.
3. Benefits are disappearing. The share of private sector workers with a pension dropped from 50.3% in 2000 to 43.2% in 2006, the last year for which data are available, and the share of people with employer-provided health insurance dropped from 64.2% to 59.7%.
4. Family debt is on the rise. In the third quarter of 2007, household debt averaged a record 133.0% of disposable income. In the second quarter of 2007, families spent 14.3% of their disposable income to service their debt, up from 13.0% in the first quarter of 2001.
5. Families feel the pressure. The share of mortgages entering foreclosure was 0.8% in the third quarter of 2007, reflecting the sixth increase in a row to the highest level on record since 1979. The share of all mortgages in foreclosure also reached a record with 1.7%.
6. Housing market slows. New home sales in November 2007 were 34.4% lower than a year earlier, and existing home sales were 20.0% lower. The median sales price of existing homes was 3.3% lower in November 2007 than a year earlier, and the median sales price of new homes had dropped 0.4%. The average monthly supply of homes for the six months ending in October was 8.9 months—the highest since March 1982.
7. Home equity declines. Home equity dropped by 2.5 percentage points relative to disposable income in the third quarter of 2007, the seventh decline in a row, ending also the largest year-over-year drop since June 1992.
8. Poverty stays high. The poverty rate fell slightly to 12.3% in 2006, down from 12.6% in 2005, but still substantially higher than the last low point in 2000, when it was 11.3%.
9. Business investment is low and productivity growth slows. Business investment averaged 10.8% of GDP between March 2001 and September 2007—the lowest share since the 1960s. Net investment, after accounting for depreciation of capital goods, averaged 2.0% of GDP at the same time—the lowest share of any business cycle. And, labor productivity growth fell below 2.0% in 2005 and 2006 for the first time since 1997.
10. Improvements in government’s finances are temporary. In August 2007, the Congressional Budget Office estimated that the deficit for 2007 amounted to $158 billion, $14 billion less than projected in January. Yet the cumulative budget deficit from 2008 to 2012 increased sharply from $194 billion to $696 billion in CBO’s projections.
11. Tax cuts do not pay for themselves. The Joint Committee on Taxation estimated that the tax cuts enacted since 2001 would cost $300 billion in 2007 alone, such that the federal government would show a surplus had it not been for President Bush’s tax cuts.
12. This endangers our economic independence. Foreign investors bought 77.2% of new Treasury debt and the share of U.S. foreign-held debt grew to 46% in September 2007 from 31% in March 2001. Interest payments from the federal government to foreigners rose to $40 billion in the third quarter 2007 from $21 billion in the first quarter of 2001.
13. Trade deficit remains high despite strong export growth. In the third quarter of 2007, the trade deficit fell slightly to 5.0% of Gross Domestic Product from 5.2% in the second quarter of 2007. Yet, the last trade deficit is still larger than any trade deficit since the Great Depression recorded before the second quarter of 2004.