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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Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith is an economist and has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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Comments

  1. And is the US going to be a “better off than the average nation” example or a “worse off than the average nation” one?

    I have always believed that the bigger the house price bubble, the bigger the ultimate stagnation. And the USA at least has the advantage that no other nation has, that it has substantial zones of sanity with no such bubbles, to which workforces and producers are gravitating.

    Some nations have done an amazing job preventing the collapse of their house price bubble, but I still maintain that the size of it is directly related to stagnation in the real productive economy. Ultimately the house price bubble has to collapse, just as a cancer that kills its own host cannot survive.

    • It would appear the housing sector has barely deleveraged, whilst govt debt has ballooned from 60% of GDP to 105% of GDP.
      Overall, I would say the US is more debt burdened than ever. The growth in total non-financial debt has expanded since 2007.
      Growth over the last four years was based on govt spending and the temporary reduction of interest rates.
      Now that fiscal deficit spending is being trimmed to 6% of GDP and interest rates are rising, it’s not surprising to some that the US economy will not recover. In 2014, taxation revenue could potentially decline due to smaller capital gains and the fact that non bank corporate earnings are declining.
      Demographics worsens the growth profile further.

  2. I will believe in a USA recovery once I see the US National Debt start to retreat….currently homing in on 17 trillion.

    http://www.usdebtclock.org/

    In short they are screwed until the medicine has been administered, ingested and time allowed for some genuine healing.

    They are light years away from that point in time, they will continue to flounder and threaten to go under until someone with some balls picks them up by the scruff of the neck and gives them a bloody good shake.

    All the rest is just smoke and mirrors….including their bullshit real estate recovery which is slowly turning into a non recovery.

    • notsofastMEMBER

      “they will continue to flounder and threaten to go under until someone with some balls picks them up by the scruff of the neck and gives them a bloody good shake

      No, won’t make any difference. Not an ounce.

      The key reason why debt needs to keep rising is because of imbalances in saving and spending patterns in countries and in the global economy. Money is being accumulated, largely in offshore locations and can only be recycled into a countries economy as ever increasing debt. Until that changes, debt cannot be decreased without collapsing the economy. And of course if the flow of debt is stopped because the country isn’t doing “the right thing” then the economy collapses.

      And keep in mind the “bullshit” real estate sector was the sector which kept the US economy and indeed most western economies going after they decided to donate most of their industrial capacity to other countries and go on a spending spree to buy products from everyone else. The problem was most people found much of their hard earned wealth evaporate when their houses weren’t worth anywhere near as much as they thought.

      • So in other words they are completely and utterly f*cked no matter which way they cut it ?

        They do need someone to make some brave decisions but that will never happen until after the entire financial house of cards comes crashing down and the only way forward will be by adopting a sounder financial system whereby our current debt based system is consigned to the dustbin of history.

        Could be a long time coming as the powers that be will fight any change until all is lost.

        Evaporation of wealth – bound to happen here in Australia as well considering the majority of our ‘precieved’ wealth is tied up in bricks and mortar. Any significant jolt to our house prices will ensure we play catch up quick fast with the rest of the world when it comnes to financial pain.

      • “…..So in other words they are completely and utterly f*cked no matter which way they cut it?…”

        If that is so, most other developed nations are in even more trouble.

  3. notsofastMEMBER

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

    Not buying it and I don’t think anyone else should.

    The comment should read,

    Overall, high oil prices are the key reason why growth rates in the US (and elsewhere) are likely to underwhelm in the decades ahead.

    In 2002 the US was consuming about 20mbd at an average price of about $25 per barrel. Total cost to the US economy about $180 Billion per year.

    In 2012 the US was consuming about 18mbd at an average price of about $100 per barrel. Total cost to the US economy $650 Billion per year.

    • Jumping jack flash

      The good old petrodollar made sure that oil was cheap, but something has changed recently and it doesn’t seem as good as it once was at keeping the price down.

      I would also extend the new normal of high oil price to higher priced energy, in general.

      Just like we can now feed our families for under $10 if you like healthy, vibrant, tasty, and nutritious mince, and only mince (sarc – cue the dancing letters M-I-N-C-E on the TV which sickens me to my core), so we too can run our cities, industries, and provide energy to the people if we like expensive solar power, and low energy density natural gas and ethanol…

      It is just the western standard of living slipping away.

      • This is exactly what is happening and until the wages of west nations equalize the levels in China and the rest of developing world, the western living standard of working people will fall further.

        Living in a global economy means significant living standards differences cannot be tolerated and they are going to be slowly trimmed.

        At the end hasn’t exactly been that the main purpose and meaning of globalization via outsourcing all productive jobs to poor developing nations with very low and socially unprotected standard. It is a law of interconnected vessels.

  4. Jumping jack flash

    In my opinion the US economy wont recover because of greed and the idea that they, and us, still deserve something for nothing.

    That we all deserve high wages for doing nothing substantial.

    If wages are actually lowering that is great news.

    The next step is to encourage productive capacity and harness the cheap labour. That can be done through strategic and proper use of debt, or through foreign investment.

    But greed, selfishness and superiority will get in the way and there will always be those who think that “everyone else” should take pay cuts but not them, because somehow their contributions are so much more important.

  5. I posted this in Links but I consider it worth a read in light of this post
    August 27, 2013 at 8:46 am http://www.theburningplatform.com/?p=58756
    Trying to stay sane in an insane world Part 3

    In light of these posts I’d reiterate my belief that fiddling with interest rates etc will do nothing to solve our long term problems. Our economies have been so distorted by negative RAT interest rates building debt upon debt, distorting our economic and social structures, for decades that it is virtually impossible to now fix the problems.

    We would have to go right back and look seriously at what we want from education. Then we’d have to train some teachers to deliver that who would then have to train some teachers etc etc. It would take generations. Then once we’ve got people trained for productive lives how do we employ them? How do we rebuild a complex structure?

    The biggest hurdle we face however is ‘us’ and how our perceptions of ourselves and our entitlement has changed over three generations.

    It’s just such a total mess.

    Given that every economist I hear of, except for a few on the fringes like Doug Noland, Jim Quinn et al, advocate more and more debt the chances of anything by way of reform, is ZERO!

    The answers lie back in time.

    P.S. The worst of it is that we still hear “Consumption drives the economy!’ What a croc!

    • P.S. The worst of it is that we still hear “Consumption drives the economy!’ What a croc!

      No one produces surplus for perpetuity.

      Likewise, not all nations can run a a current account surplus simultaneously.

    • Flawse .. “The answers lie back in time.” that is a great line which sums up very concisely where we are.

      However, you could also argue that the answers don’t lie back in time. We never had the answers to the huge changes coming down the pipe and we still don’t have them. If we had started to address these issues back then, we might actually be closer to finding a solution, but to be realistic we were always heading for a faceplant.

      Try this. Over the last centuries we have had an industrial revolution, scientific revolution, information revolution. The revolutions seem to be coming faster. What we are seeing is growing pains for humanity. The terrible teens. Will we learn from this and adopt better financial and political models? Perhaps. Or maybe we will spent the next thousand years in an endless cycle of self destruction banging our heads into the same brick wall.

      I am thinking that if we ever do contact extraterrestrials, they will have a text book called “The Rise of Intelligent Civilizations – 101” and all our trials and tribulations will be listed there.

      • DM
        Just to be clear I sure as hell don’t have the answers. Also I’m not trying to rectify humanities problems. I just look at Aus really however the western world generally are all riding the same debt horse.
        So just on a minor note…
        I just look at modern economics that ignores CAD’s. Now I don’t regard a CAD as the ONLY factor one ought look at to gauge the direction of an economy but it is an important sign post. If you are having to continuously borrow and sell assets to fund a CAD something is terribly wrong. You are consuming too much or not producing enough. We started with this chronic CAD in 1959. if someone had taken more corrective action back then and continued to do so through the decades we might have a very different ball game at this stage.
        Instread we seem to have arranged our economic theory just so we can ignore anything that might stand in the way of our own self-indulgence. We just desire a happy ending so we create any fairy story to suit the ending we want. We are starting to find that reality is a little different to fairy stories but we are damned slow to learn.

        It’s really this that pisses me off.

      • Yes. I guess I am starting to be a little fatalistic about it. If its all going to hell, maybe its best to rip the bandaid off early?

        I actually can’t get my head around economics, so in a sense things like CAD are out of my grasp. Every time I try and work out how these things operate I just end up with more unanswerable question.

  6. Hmmm, so you take their wages away, and they only manage to uphold aggregate demand by increasing marginal debt levels, until they can’t absorb any more debt….

    and the question you ask is “where have our customers gone?”

  7. The United States became rich by PRODUCING QUALITY consumer goods at good prices and selling them to the rest of the world.

    They didn’t get rich by CONSUMING another countries consumer goods (CHINA).

  8. What the US really needs to do is spend some of that newly minted currency on sorely needed upgrades to infrastructure projects and try to feed cheaper energy into their manufacturing processes and support industries where they have a competitive advantage or where they could easily have one with some spend. This will boost productivity, wages and aggregate demand.

    Too busy creating zeros on computers for banks and instos to borrow trying to reflate stocks and houses and get the rich to spend and make the poor even poorer.

    • darklydrawlMEMBER

      Sadly the political system in the US is pretty much broken. Whilst some Government funded quality infrastructure projects would do the US the world of good, half the folks in congress would be driven out of town by pitchfork wielding citizens crying “Communists – Communists!!” Sad, but true. They would rather rot than accept the fact that sometimes Government is the answer.

    • JC they might be able to do that as long as other nations are prepared to continue to accept their bits of coloured paper.
      There are signs everywhere that that time is starting to run out.

  9. The current malaise in western economies has been as much driven by emerging nations as it has been by actions of western governments or the demands of western consumers. Emerging nations have been determined to build up reserves of foreign currency and so have run current surpluses. At the same time they have been determined to build exports of consumer goods to western nations and have done so by ignoring environmental and safety concerns and by cutting margins, while repressing wages.

    As Rusty Penny pointed out above, nations cannot all run current account surpluses at once. The surpluses accrued by developing nations have to come at the cost of current account deficits elsewhere. Similarly, if western nations are unwilling to compromise on environmental and safety standards and on wages, their manufacturing is inevitably going to move offshore.

    This process, however, can only go so far before it starts to unwind. For example, China is getting seriously concerned about environmental degradation. Action will follow, and manufacturing costs in China will rise, on top of the rises already being driven by wage increases. The process will be repeated in other nations with large young populations (Indonesia, Iran and Pakistan come to mind) until there are no countries left with sufficiently stable government to tempt manufacturers to move. Then the pendulum will start to swing back. Should only take another fifty years or so.

    • Alex
      We didn’t have to print the money to fund our over-consumption. That was a decision we made.
      Similarly we didn’t have to go into massive debt to fund our natural resource development. We chose to so that we could continue to consume at the level to which we wanted to become accustomed.
      These were quite conscious decisions we made. At any point we could have bitten the bullet….we didn’t.

      Our problems are our own damned fault. The business of blaming emerging poorer nations for our problems is just BS

      • P.S. re pendulums there is not another China in the world. This isn’t a pendulum. We are at a later stage in a cycle that has been running for 50 years. There will not be another one like it despite what we in the western world think we want.

      • Obviously, I don’t agree. Yes, it takes two to tango but if we had gone in the direction you favour I believe we would have ended up worse off. I agree that we may have gone further than we needed to, but not that it would have been possible to resist the global changes that were happening around us.

        The world wanted our resources and wanted them on a timetable we couldn’t have financed without borrowing. Not to mention that we couldn’t have stopped companies borrowing to develop resources anyway. If we had stopped them developing here, they would have gone elsewhere. Yes, we would have less overseas debt. But we would also have been a less productive nation and hence poorer.

        PS, most of the debt has been driven by our totally defective land policies. We have borrowed to pay windfall profits to land holders.

      • HMMM

        Shall we look at the economy as a whole organism relying on the whole to produce wealth across the various sectors rather than letting one sector run rampant at the cost of the others. That there is an interrelationship between a stable, educated and happy workforce and economic wealth.

        HMMM

        Seeing that the world economy is interrelated and that there are only so many slave countries that we can reply upon to underpin our various appetite for things.

        HMMM

        Cause and effect and the need for equilibrium to ensure that every sector benefits during the various cyclical upswings for continued stability.

        HMM

        The secret is ethical consumption that is not underpinned by the depletion of other assets.

        Are you all Greenies and you don’t know it???