I recommend that you read the article by Neil Irwin in the New York Times, "5 Sectors to Blame for Economic Weakness." Mr. Irwin reports on some statistics that he has produced, which, I believe, point to the fact that the economy is suffering through something more than just a cyclical weakness.
To try and get a grasp on the reasons for the economic weakness, Mr. Irwin adjusts the data on Gross Domestic Product to determine, given the historical experience, how each segment of economic demand is performing in this recovery relative to how it has performed in other, post-World War II recoveries.
He focuses on the five sources of demand that come in the weakest, in this relative study. To me, these weaknesses point to structural problems that we need to consider going forward.
The largest shortfall has come in "residential investment"…housing. This sector accounts "for $239 billion, or 1.4 percent in missing economic output." Mr. Irwin points to a shift that may have taken place here. Young adults may have shifted in their housing preferences.
For the almost seventy years that followed the end of World War II, it has been the goal of most young Americans to own their own home. And, it has been one of the major goals of America's politicians to get young Americans into their own home.
This goal, I believe, has shared top billing in the political arena with the goal of high rates of employment. These two goals have been almost the whole justification for the extreme measures of credit inflation that the United States has experienced during this time period. And, I believe the Republicans are as guilty of this pursuit as are the Democrats.
We now are in a situation where a lot of young adults don't have jobs…or, at least, full-time jobs. This is especially true of the young adults that do not have more than a high school degree or only a couple of years at college.
Those young adults that have completed college and do have jobs may often have a bundle of college debt. And, even they are not feeling real secure in their positions…yet.
Then there is the housing debt that is outstanding. Many young adults today have seen the problems that their parents…their family…their neighbors…have faced in being foreclosed upon, or, that face delinquencies, or, have difficulties with financial institutions. They don't want to be faced with the same traumas.
Furthermore, with all the things going on in their lives, they don't want the responsibilities…at least before they have children…of taking care of a residential property. And, then there is the transportation from the suburbs to the cities…that these young adults don't wan to have to face.
In other words, there is a structural shift taking place in the society and the government, no matter how hard it tries, may not be able to get these young adults to go back into home ownership the way their parents did.
The second largest shortfall found by Mr. Irwin is in State and Local government spending. Over the past ten years state and local governments have faced huge financial burdens…and, the financial markets have not let them get away from them.
There have been municipal bankruptcies, Detroit being the largest and most reported upon. But, there have been numerous other city problems. There have been huge problems connected with school systems and the ability of the local community to carry the burden of these expenses. School unions and municipal and state government unions are finding it more and more difficult to use their leverage in negotiations with their employers.
Also, there are a raft of pension problems at the state and local level that have not been resolved. Some of these might lead to even further bankruptcies before everything gets worked out.
The shortfall of state and local governments, Mr. Irwin calculates, is almost $190 billion. To me, state and local governments are in the process of re-structuring their budgets to resolve these issues and move forward with "real" balanced budgets. This will continue to impact real GDP for the foreseeable future…don't expect a pickup here.
The third shortfall comes in the area of the acquisition of consumer durable goods. The shortfall here is almost $180 billion.
This shortfall is subject to some of the same problems faced in residential construction. Labor force participation is down to a thirty year low, there is a substantial debt overhang in the economy, and polls still indicate that more than 50 percent of those polled do not believe that the economy is in that good shape. Yes, car sales have picked up but, overall, this spending category continues to lag previous recoveries…by a lot!
Fourth, business equipment investment is running $120 billion short of the "healthy economy model." I believe that there are a couple of reasons for this. One of them is that the economy is not healthy and so it is difficult for businesses to feel confident about investing in the future.
I believe that some of this lack of confidence can be attributable to the fact that one of the "good" sectors in this study has exceeded the "healthy economy model" and that is business inventories. Business inventories are greater than would be the case, but this is because goods aren't selling as rapidly as in previous recoveries and so confidence is not high because sales are not keeping inventories down.
The other factor is that businesses are totally confused about the economic policies of the government. These businesses see little or nothing coming down the road for them as President Obama seems more and more like a "lame duck" president and there is also a very uncertain "world situation" that is weighing over a lot of thinking these days.
And, this comes in spite of historically low interest rates and historically high stock prices. The money that corporations are raising in the capital markets are going to stock buybacks, dividends, and other "financial" engineering to help boost stock prices. Little or nothing is going into physical investment.
The fifth shortfall…federal government spending, which is almost $119 billion short of the "healthy economy model." Let me just restate something I just wrote…there is little or nothing coming down the road" that will contribute to a faster rate of growth in the economy. The shortfall is due to fact that little or nothing has come down the road over the past few years.
Basically, the federal government seems to be structurally incapable at the present time.
Two very important sectors are doing very well: Services consumption and Intellectual Property Investment. I would argue here that the well-being of these sectors points to a shift in the type of spending that will be important in the future, but that places new demands on the labor force, demands that are not going to be structurally met in the near term through government spending aimed at putting people back to work in the jobs they were laid off from.
Mr. Irwin's report is a very important contribution because it points to structural changes in the United States economy that are not going to be resolved…on the good side or the bad side…through further efforts at credit inflation. Only longer-term efforts will do the job!
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