Why the US economy won’t fully recover

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By Leith van Onselen

The Wall Street Journal (WSJ) has produced two excellent reports shining a light on why the US economy will continue to struggle and won’t produce a full-fledged recovery.

In the first of these reports, the WSJ looks at average real US wages, which have fallen since 2009 and are erroding the purchasing power of consumers, denting consumption expenditure:

Stagnant wages erode the spending power of consumers. That means it is harder for them to make purchases ranging from refrigerators to restaurant meals that account for most of the nation’s economic growth.

All told, Patrick Newport, an economist at IHS Global Insight, expects real wage growth of only 1% by the end of 2014. That is “good news for employers,” he said, “not-so-good news for workers.”

Consumers remain the biggest driver of the U.S. economy, but without more money coming in, it will be difficult for them to spur robust growth.

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The second report examines the ageing of the US population, which will shrink the relative size of the working-aged population, reducing potential growth of GDP and incomes in the process:

New research by two economists, Richard Burkhauser of Cornell Universityand Jeff Larrimore of Congress’s Joint Committee on Taxation, suggests things may get even worse in coming years—thanks to two basic population trends. After supporting the economy during their peak earning years, America’s Baby Boomers are starting to retire, which will mean higher numbers of lower-income older individuals. Second, the researchers argue, relatively high-earning whites are over time being replaced by minority workers, especially Hispanics, who tend to make less money.

Burkhauser and Larrimore project these two factors will reduce growth in median incomes by about 0.5% per year through 2030.

Demographic trends used to support income growth. The median household income rose about 9% between 1979 and 1989 and 13% between 1989 and 2000, the researchers note. A key driver was the increased employment and earnings of women.

But in the mid-2000s incomes slumped. Many Americans apparently took this in stride since home values were climbing significantly, boosting wealth, and credit was easy to get. To offset stagnant incomes, Americans took on more and more debt, which made the Great Recession that much worse, according to a separate paper by New York University economist Edward Wolff. As the crisis took hold, net worth plummeted. At the same time, median household income dropped about 7% from 2007 to 2010, more than the 3.5% fall seen between 2000 and 2004 and a 4% decline between 1989 and 1992.

The demographic pressures facing the US are being played-out right across the developed world (and in China). While the workforces of many Euro countries have been in relative decline for more than a decade:

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It is a relatively new phenomenon for the Anglospehere nations:

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Overall, population ageing is a key reason why growth rates in the US (and elsewhere) are likely to underwhelm in the decades ahead.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.