Press Release

The U.S. Economy in Review: 2006

Slowing job growth, a deteriorating housing market and increasing indebtedness to foreigners underscore the fragile state of domestic economic growth

WASHINGTON, D.C.- One word—slowdown—can define the U.S. economy this past year. Economic growth and job growth both fell in 2006 from previous years as the residential housing boom came to an end. The slowdown in employment growth and economic opportunity was home grown as consumers saw rising debt payments on the record debt built up in past years. This debt squeeze leaves less money available for key household expenditures and is already beginning to push many hardworking families over the edge amid rising loan defaults and bankruptcies.

Yet at the same time, the federal government in 2006 continued to run large deficits— financed in large part by overseas investors—resulting in higher interest payments out of the U.S. Treasury. This outflow, in turn, exacerbated an already record high trade deficit fuelled by America’s large dependence on foreign oil and rising oil prices over most of the past year.

Specific economic statistics in 2006 are as disconcerting as the overall picture as we head into 2007. Consider the following sets of numbers from this past year:

The economy slowed:

• Economic growth slipped to 2.0 percent in the third quarter, following 2.6 percent growth in the second quarter and a surprisingly strong first quarter growth of 5.6 percent. This was the first time in more than three years that the economy registered two consecutive quarters of growth below three percent.
• Consumption growth also slipped. Consumption growth was 2.8 percent in the third quarter following a 2.6 percent increase in the second quarter. Again, this was the first time in more than three years that consumption growth was below three percent in two consecutive quarters.
• Retail sales weakened. From June 2006 to November 2006, retail sales grew each month on average by an annualized rate of 4.2 percent, down from 6.4 percent in the first six months of 2006.

The labor market weakened:

• Job growth continued to drop. In 2006, the economy added on average 149,000 new jobs per month, down from 165,000 new jobs in 2005 and 175,000 in 2006. Job growth was 14.5 percent slower in 2006 than in 2004, the year with the highest job growth in this business cycle, which started in March 2001.
• Wages made up a record low share of national income. In the third quarter, wages and salaries made up 51.4 percent of national income, the smallest share since the U.S. government began to collect this data in 1947. Total compensation, which includes benefits, dropped to the lowest share in nine years. At the same time, profits grew to the largest share of national income since 1947.

The housing boom ended:

• Home appreciations decreased. In the first three quarters of 2006, the prices of all homes grew on average by an annualized rate of 5.9 percent, the lowest growth rate in any year since 1999, down from 12.5 percent in 2005 and 11.2 percent in 2004.
• Homes no longer flew off the market. The supply of homes for sale each month averaged 6.9 months of supply for the six months ending in October 2006—the largest average supply since 1991.

Consumers felt the pinch of record debt:

• Consumer debt soared to new heights. Household debt relative to disposable income continued to rise throughout 2006, reaching a record 130.9 percent by the end of the third quarter.
• Debt payments rose to highest on record. In the second quarter of 2006, families had to spend 14.4 percent of their disposable income to service their debt—the largest share since 1980.
• Families felt the pinch. Mortgage delinquencies rose to 4.7 percent of all mortgages in the third quarter, up from 4.4 percent in the first and second quarter of 2006. The share of all mortgages in foreclosure grew to 1.1 percent of all mortgages, the highest level since the first quarter of 2005. The default rate on credit cards also rose, to 3.9 percent in the third quarter, up from 3.5 percent in the second quarter, and 3.0 percent in the first quarter. And there were 2.2 bankruptcy cases per 1,000 people in the third quarter, up from 2.0 cases in the second quarter and 1.5 cases in the first quarter—an alarming rise.

U.S. still imports vastly more than it exports:

• The trade deficit widened. By the third quarter of 2006, the difference between imports and exports had grown again to over six percent of Gross Domestic product, a feat only accomplished once since the Great Depression (in the fourth quarter of 2005).
• At the heart of the widening trade deficit was America’s dependence on foreign oil. During the first 10 months of 2006, the deficit in petroleum-related goods grew by $46.1 billion relative to the same period in 2005—or almost twice as much as the deficit with China.

The U.S. government owes massive debt to foreigners:

•The federal government remained awash in red ink. For 2006, the expected federal deficit is $260 billion. Making the Bush administration’s tax cuts permanent and introducing relief from the Alternative Minimum Tax would carry the deficit to $3.5 trillion over the next decade, according to the Center on Budget and Policy Priorities. In this scenario, the federal deficit would never dip below $284 billion, even if the costs of the war in Iraq and Afghanistan decline.
•Foreigners financed vast shares of the federal budget deficit. Since March 2001, when the current business cycle started, foreign investors financed 77.9 percent of the federal budget deficit. The share of Treasuries held by foreigners grew to 45.0 percent at the end of the third quarter, up from 43.8 percent in the first quarter, and 44.6 percent in the second quarter.
• The U.S. Treasury sent more money abroad. Interest payments by the federal government to foreign lenders grew to $37.3 billion in the third quarter of 2006, up from $36.4 billion in the second quarter, and $32.8 billion in the first quarter.