The economy and the labor market are maintaining modest momentum, despite continuing obstacles such as high levels of household debt, a lingering financial crisis in Europe, and continued fiscal uncertainty in the United States. Unemployment remains a serious economic hardship for millions of Americans, particularly for those who have been looking for a job longer than six months. Policymakers can and should do more to strengthen economic and job growth in order to help the most vulnerable in this economy.
Over the past few years, targeted policies have productively intervened in the economy and in the labor market. This has also highlighted the policies’ goals. Policymakers can, for instance, invest in infrastructure, which offsets weak business investment and export growth, and lays the foundation for stronger private-sector growth in the future as the cost of doing business in the United States declines with better infrastructure. Policymakers should also consider boosting personal incomes for the most vulnerable Americans by implementing a higher federal minimum wage, which would increase consumption, and help low-income households get out from under their massive amounts of debt faster. Similarly, public policy can ease the still-high burden of debt by facilitating the refinancing of existing mortgages, which are the single largest share of household debt. These actions could seriously help struggling Americans and would certainly boost the economy.
1. Economic growth slowed markedly at the end of 2012. Gross domestic product, or GDP, was essentially flat in the fourth quarter of 2012, increasing slightly at an annual rate of 0.1 percent. Domestic consumption increased by an inflation-adjusted annual rate of 2.1 percent; housing spending grew by 17.5 percent; and business investment accelerated by 9.7 percent. In the fourth quarter of 2012, however, exports fell by 3.9 percent, and government spending shrank by 0.7 percent. Policy solutions should therefore aim to ease the strain of fiscal austerity on the economy by dampening spending cuts, and they should boost domestic private-sector economic activity to offset the fall-off in overseas demand.
2. The moderate labor market recovery continues in its fourth year. There were 4.5 million more jobs in February 2013 than in June 2009 when the economic recovery officially started. The private sector added 5.2 million jobs during this period. The loss of nearly 722,000 state and local government jobs explains the difference between the net gain and the private-sector gain in this period, as budget cuts reduced the number of teachers, bus drivers, firefighters, and police officers, among others. Job creation should be a top policy priority since private-sector job growth is still too weak to quickly overcome other job losses and rapidly lower the unemployment rate. Once again, removing the uncertainty over fiscal changes is a key step toward strengthening economic and job growth.
3. Long-term unemployment stays high. The unemployment rate stood at 7.7 percent in February 2013. And long-term unemployment—defined as people who are out of work and have been looking for a job for more than six months—ticked back up again. In February 2013, 40.2 percent of the unemployed were considered long-term unemployed. The average length of unemployment also grew slightly in February 2013, rising to 36.9 weeks. Those out of a job for a long time struggle to regain employment because their skills atrophy, and re-entry into a new job becomes increasingly harder. The continuation of extended unemployment insurance benefits as part of the resolution to the fiscal showdown on January 1, 2013, was thus a welcome policy that helped many of those most vulnerable to economic shocks.
4. Labor-market troubles fall especially hard on communities of color, young workers, and Americans with less education. The African American unemployment rate in February 2013 was 13.8 percent; the Hispanic unemployment rate was 9.7 percent; and the white unemployment rate was 6.8 percent. The population groups with higher unemployment rates—those that typically also have low incomes and little wealth—have struggled disproportionately more amid the weak labor market than white workers, older workers, and workers with more education. This creates a greater need for progressive policy actions to strengthen job creation for everybody. Meanwhile, youth unemployment stood at 25.1 percent. The unemployment rate for people without a high school diploma ticked down slightly to 11.2 percent—compared to 7.9 percent for those with a high school degree, 6.7 percent for those with some college education, and 3.8 percent for those with a college degree.
5. Household incomes continue to drop amid prolonged weaknesses in the labor market. Median inflation-adjusted household income stood at $50,054 in 2011—the most recent year for which data is available—its lowest level in inflation-adjusted dollars since 1995. Median income fell by 1.5 percent in 2011, dropping for the fourth year in a row. American families as a whole have experienced no income gains during the current economic recovery since 2009, exacerbating the losses that occurred during the Great Recession.
6. Income inequality on the rise. Incomes of households in the 95th percentile—with incomes of $186,000 in 2011—were more than nine times the incomes of households in the 20th percentile, whose incomes were $20,262. This is the largest gap between the top five percent and the bottom 20 percent of households since the U.S. Census Bureau started keeping record in 1967.
7. Poverty stays high. The poverty rate fell to 15 percent in 2011, down from 15.1 percent in 2010. The African American poverty rate was 27.6 percent; the Hispanic poverty rate was 25.3 percent; and the white rate was 9.8 percent. The poverty rate for children under the age of 18 stood at 21.9 percent. More than one-third of African American children—38.8 percent—lived in poverty in 2011, compared to 34.1 percent of Hispanic children, and 12.5 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 citizens.
8. Employer-sponsored benefits disappear. The share of people with employer-sponsored health insurance dropped from 59.8 percent in 2007 to 55.1 percent in 2011, the most recent year for which data is available. The share of private-sector workers who participated in a retirement plan at work fell to 39.2 percent in 2011, down from 42 percent in 2007. Families now have less economic security than in the past due to fewer employment-based benefits, which requires more private savings to make up the difference.
9. Family wealth losses still linger. In December 2012, total family wealth was down $8.4 trillion (in 2012 dollars) from March 2007—its last peak. Homeowners on average own only 46.6 percent of their homes—compared to the long-term average of 61 percent before the Great Recession—with the rest owed to banks. Homeowners’ massive debt slows household spending growth, as households still do not have a lot of collateral for banks to loosen their lending standards, and households spend less than they otherwise would on new homes and on other large-ticket items.
10. Household debt is still high. Household debt equaled 105.5 percent of after-tax income in December 2012, down from a peak of 126 percent in March 2007. The unprecedented fall in debt over the past few years is a result of tighter lending standards, falling interest rates, massive foreclosures, and increased household saving. But unless incomes rise faster than they have in the past, further deleveraging will likely slow since most factors that helped reduce household debt in the past have slowed or disappeared, such as falling interest rates and the payroll tax holiday. This high debt could continue to slow economic growth, as households focus on saving rather than on spending.
11. The housing market is finally recovering from historic lows. New home sales amounted to an annual rate of 437,000 in January 2013—a 28.9 percent increase from the 339,000 homes sold in January 2012, but well below the historical average of 698,000 before the Great Recession. The median new home price in January 2013 was 2.1 percent higher than one year earlier. Existing home sales were up by 10.2 percent in February 2013 from one year earlier, and the median price for existing homes was up by 11.6 percent during the same period. The housing market could potentially grow and contribute to economic progress because the recovery in the spring of 2012 started from historically low home sales, and the housing market fell throughout most of the recovery. The fledgling housing recovery could gain further strength if policymakers focus on personal income gains in the near term.
12. Homeowners’ distress remains high. Even though mortgage troubles have gradually eased since March 2010, nearly one in nine mortgages is still delinquent or in foreclosure. In the fourth quarter of 2012, the share of mortgages that were delinquent was 7.1 percent, and the share of mortgages that were in foreclosure was 3.7 percent. Many families delayed and defaulted on mortgage payments amid high unemployment and massive wealth losses. This caused some banks to be nervous about extending new mortgages, which further prolonged the economic slump. Policymakers can accelerate economic growth by helping households lower their debt burdens through refinancing help and debt forgiveness.
13. Near pre-crisis peak profits are not reflected in investment data. Inflation-adjusted corporate profits were 85.2 percent larger in December 2012 than in June 2009, when the economic recovery started. The after-tax corporate profit rate—profits to total assets—stood at 3.1 percent in December 2012, nearing the previous peak after-tax profit rate of 3.2 percent that occurred prior to the Great Recession. Corporations used their resources for purposes other than investments in plants and equipment. The share of investment out of GDP stayed low, with 10.4 percent in the fourth quarter of 2012, compared to an average of 10.9 percent during the prior business cycle from March 2001 to December 2007.
Christian E. Weller is a Senior Fellow at the Center for American Progress and a professor in the Department of Public Policy and Public Affairs at the McCormack Graduate School of Policy and Global Studies at the University of Massachusetts Boston. Sam Ungar is a Special Assistant for Economic Policy at the Center.