The U.S. economy has shown signs of life recently, with unemployment inching lower, the housing market picking up, and consumers becoming more willing to borrow. Consumer confidence also has been trending upward; it reached a four-year high in the month before the presidential election. But the improved indicators haven’t translated into robust gains—GDP growth has remained below 3%—and after an election that left the balance of power essentially unchanged in Washington, there is still concern about political gridlock.
Tim Hopper, TIAA-CREF’s chief economist, discusses the still-fragile recovery and the structural changes needed to re-ignite the economy.
There have been some positive indicators for the economy lately. Are we headed for a more sustained recovery?
The answer is yes, but it’s happening slowly. We’re not there yet.
Why has the recovery in the U.S. been so sluggish?
It goes back to the type of recession we experienced and where its epicenter was. This recession was unusual because it was centered in the financial sector and also in the place that hurts consumers the most, which is the value of their homes.
A typical recession, if it’s deep enough in a particular area—such as manufacturing, some part of the consumer sector, or construction—will affect the rest of the economy. But those sorts of recessions can be addressed by the Federal Reserve’s practice of stimulating the banking community by lowering interest rates. Since demand is relatively healthier in other areas of the economy, the low interest rates filter through, allowing a recovery to begin more quickly.
With this recession, because the crisis was centered in finance, Fed-induced intermediation has been a less efficient way of spreading low interest rates and demand across the economy. The banks have gotten an infusion of cash, but they haven’t turned around and made loans.
Additionally, the housing downturn has had an impact on the balance sheet of just about every American who owns a home. This balance-sheet deterioration has produced a dramatic shift not only in American consumers’ ability to spend but in their thinking about spending. Even when they start spending again, they are going to be more conservative. And because of that, the recovery, by definition, has to be slower.
These two things together make this a vastly different downturn than most of those we’ve had in the past.
Some recent reports suggest that the housing market is finally improving. What would that mean for the economy?
Housing has definitely bottomed. Of the 20 major mortgage markets, 17 or 18 of them are either seeing gains or are expected to see gains over the next year.
For consumers, again, it’s a balance sheet issue. If houses are going up in value, people feel wealthier. And then they can start thinking about consuming again. Life gets back to normal.
Home improvement is the first area that sees gains when the housing market emerges from a recession. People may still be spending conservatively—they’re not going out and buying a new house. But at least they feel they have enough money to fix or add onto their homes. Home improvement stores are already starting to see the benefits of this recovery.
Still, it’s too early to claim that the housing problems are behind us, that we should expect normal housing behavior in both construction and sales, because we’re not there yet. We are moving in the right direction, but slowly.
The U.S. economy was clearly over-leveraged in 2008—including, arguably, too much credit card debt. What does it mean that consumers have become more conservative in this area?
It’s a good thing. We as an economy have tended to spend and spend and spend, and to rack up debt. This juices the economy in the short term. But in the long term, spending helps the most—and debt helps the most—if it takes the form of investment, meaning if it becomes money that businesses can use on new factories and equipment, and on other productive assets.
By spending less on credit cards and less on debt, and saving more, consumers are not providing the short-term boost to growth that is needed. However, they are helping establish a healthier and longer-lasting recovery cycle in the process—at least theoretically. But the spending being done at the government level—in Washington and by the states—runs the risk of completely overshadowing consumers’ increased savings. In the end, if we have to raise taxes in some Draconian fashion to pay for all the spending we’re doing today, Americans won’t have as much money available for investment, and the benefits of this laudatory behavior will be washed away.
With unemployment below 8%, is the jobs picture improving?
Unemployment hasn’t come down in a meaningful way yet. That number really needs to move a lot more.
In addition, the real unemployment rate is closer to 15%. This higher figure includes people who would like full time work but have settled for part time, or who would like a job but have become discouraged and aren’t even looking anymore.
The underlying problem is that real wages in the U.S. have been declining for the past four or five years. This is an anomaly. Wages typically go up over time. We all get merit raises or promotions. Things tend to progress in a regular fashion.
During the recession, that process began to unwind. As people were laid off, they lost their incomes, and then as some of those people were rehired, they were rehired at lower salaries.
If incomes across the economy are falling, then the standard of living is going to be lower, as is the ability to go and buy things. Households eventually reach a new equilibrium, but it’s from a lower base. We are getting to that point now.
Now, there are a few silver linings in this. One is that we’re heading into a new replacement cycle—meaning a time when consumers have to make home repairs or buy new appliances and cars, even if they’re not sure they can afford to. That won’t lead to tremendous growth, but it will help. The other silver lining of an extended period of high unemployment and lower wages is that manufacturing in the U.S. is now cheaper than it used to be. That has improved our competitiveness, especially in comparison to Europe, and we’re starting to see a repatriation of manufacturing employment back to the United States.
What has kept U.S. companies from hiring in the last few years? Haven’t they been doing well from an earnings perspective?
Yes, they have. But if you parse the numbers, earnings aren’t improving because sales are growing; it’s because companies’ internal cost structures and debt levels are going down. That’s not the healthiest way to achieve higher profits.
In terms of other barriers to hiring, companies are facing great uncertainty surrounding fiscal and regulatory policy. Political polarization is at a historical high; so is regulatory uncertainty. Any time you get this amount of uncertainty, businesspeople clam up. If they don't know what their cost structure is going to be, they’re not going to hire people. Likewise, if employees don’t know how much is going to be in their take-home pay, they’re not going to spend and invest as much. It’s just a natural reaction.
What effect have the economic struggles of other countries had on the U.S.’s recovery efforts?
It’s kind of a ripple effect, like dropping a rock in a pond. What has happened is that different economies have experienced different levels of recession at different times, and the slowdown in trade patterns and demand patterns has reverberated. Things might pick up here, but then we get hit by the next wave. This has happened time and again over the past three or four years, and it has made it very difficult to recover.
The good news is that future effects are likely to be fairly limited. Europe is slipping toward recession, if it’s not already there. But because growth in Europe has been depressed for so long, the U.S. economy has already reduced its exposure to Europe’s troubles. And the emerging markets in Asia, particularly China, are not as bad as the headlines would indicate. China seems to have hit bottom and activity is beginning to resume. With growth likely to be at or near 8% by the end of 2013—not as strong as the 10%-12% we’ve seen in previous years but still relatively robust—it’s unlikely that China’s slower growth rate will have a particularly helpful or harmful effect on the U.S.
How do we get out of this cycle of choppy growth?
From a structural standpoint, we need policy certainty so that business can get back to business. I’m not confident that the recent election is going to lead to more bipartisanship in Washington, or to a timely resolution of the differences that are leading us to the fiscal cliff, but we could certainly use some progress on those fronts.
There is also a practical sense in which we just need time. Eventually—no matter what happens in Washington—inventories will deplete. You get to the point where businesses have to start producing more goods because there's underlying demand, and at that point, you'll start to see hiring. It’s a natural progression that we're on, and while it’s a little bit disaggregated, it will take place. I would predict that 2013 is when we'll see that engine of growth really start to kick in.
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TIAA-CREF Asset Management provides investment advice and portfolio management services to the TIAA-CREF group of companies through the following entities: Teachers Advisors, Inc., TIAA-CREF Investment Management, LLC, TIAA-CREF Alternatives Assets, LLC and Teachers Insurance and Annuity Association® (TIAA®). TIAA-CREF Alternatives Assets, LLC is a registered investment advisor and wholly owned subsidiary of Teachers Insurance and Annuity Association (TIAA).