Putting America’s Recovery to Work
Laura Tyson
FEB 12, 2014
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BERKELEY – America’s economy grew much more rapidly than expected in 2013 and appears poised to strengthen further this year. But there is still considerable slack in the labor market, and, as long as it persists, the gains from faster growth will continue to be concentrated at the top of the income distribution, as they have been throughout the recovery.
According to recent BEA estimates, real (inflation-adjusted) GDP grew at a 2.7% average annual rate in 2013, compared to only 2% in 2012. Most forecasters – including the nonpartisan Congressional Budget Office, the so-called Blue Chip consensus, and the Federal Reserve – predict that annual real growth will reach at least 2.8% in 2014.
Despite two recent lackluster employment reports, there are many reasons to expect that growth will accelerate in 2014. The headwinds buffeting the US recovery – impaired household balance sheets, a depressed housing market, and government spending and employment cuts – are dissipating. Household debt has fallen to levels last seen in the early 1990’s, real household net worth has returned to its pre-recession peak, and residential investment as a share of GDP is rising.
Meanwhile, state and local-government budgets are improving, and the federal budget is on track to subtract only about 0.5% from GDP in 2014, compared to 1.75% in 2013. In a Congressional election year, another destabilizing showdown over the federal debt limit is unlikely.
Moreover, monetary policy is likely to remain accommodative, and inflation remains lower than expected. US Federal Reserve Chair Janet Yellen was a vocal co-architect of the Fed’s accommodative policy stance under the leadership of her predecessor, Ben Bernanke, so policy continuity is expected. Indeed, the Fed has reiterated its intention to hold the federal funds rate near zero well past the time that the unemployment rate falls below 6.5%, while gradually trimming its purchases of long-term assets – so-called quantitative easing – by $10 billion a month.
Meanwhile, private spending grew 3.9% year on year in 2013, the strongest rate in a decade, and the outlook for 2014 is promising. Improving household balance sheets imply stronger consumer sentiment. Real personal-consumption spending rose at a 2.3% annual rate in 2013, up from 2% in 2011 and 2012.
Stronger consumer spending, along with record-high corporate profits, should boost investment spending further this year, as will re-shoring of economic activity and an improving trade balance, owing to a decline in energy and labor costs in the US. Indeed, shale energy and big-data analytics, two areas in which the US has a strong competitive edge, could be significant supply-side “game changers” for growth.
Nonetheless, the outlook for US workers is less sanguine and more uncertain. Despite stronger growth in 2013, net monthly job creation, at about 193,000, was only slightly above its 2012 level (186,000) and still below its pre-recession average of 200,000. Employment at the end of 2013 was still 1.1 million short of its pre-recession peak; regaining this peak requires 7.7 million more jobs, in addition to absorbing subsequent monthly entrants to the labor force.
In November 2013, monthly job openings topped four million for the first time since 2008. But the number of job seekers exceeded the number of openings in every industry. When the recession officially ended in June 2009, there were 6.2 unemployed workers for every job opening. In November, this ratio had fallen to 2.7, compared to 1.8 before the recession began (and just 1.1 in 2000).
When the recession hit, unemployment rates for workers at all education levels jumped, and they have yet to fall back to pre-recession levels. While the short-term unemployment rate (those unemployed for 26 weeks or less) has fallen back to its 2001-2007 pre-crisis average, the long-term unemployment rate remains higher than at any time since the measure was introduced in 1948. The long-term unemployed account for about 36% of total unemployment, down from nearly 46% in March 2011 but still far above the previous peak of 26% reached 30 years ago.
The long-term unemployed tend to be older – the number of unemployed workers aged 50-65 has doubled – and those who have been laid off from previous jobs. Faster economic growth and more job openings are less likely to benefit these workers: the longer they are unemployed, the more their skills become obsolete and the more their actual or perceived employability deteriorates.
Moreover, both the short-term and long-term unemployment rates underestimate the slack in the labor market caused by the significant and sustained decline in the labor-force participation rate (LFPR) since the recession began. In 2007, 66% of Americans were working or actively seeking work; today, that number stands at 63%, the lowest level since 1977.
If the LFPR had remained at its pre-recession high, the unemployment rate today would be nearly 12%. If it had stabilized when the unemployment rate peaked in October 2009, unemployment today would be over 9%.
A critical policy question is why the LFPR has continued to decline. Demography clearly plays a role: a larger share of the workforce is reaching retirement age, while the share of those aged 16-24 who are pursuing education is rising. But the recession triggered sudden and sustained declines in the LFPR across all age groups in response to weak demand and poor job prospects. A recent CBO analysis attributes about one-half of the decline in the LFPR from the end of 2007 to the end of 2013 to these cyclical factors, with the remainder explained by secular demographic trends.
As has been painfully obvious during the last several years, prolonged labor-market slack means falling real wages for most workers, with the negative effect intensifying as one moves down the wage distribution. By the same logic, stronger growth in 2014 and tightening labor markets should lead to healthier wage gains for the 70% of the workforce whose real wages have not yet returned to their pre-recession level.
But, as President Barack Obama argued in his recent State of the Union address, it will take more than faster economic growth for American workers to recover from the Great Recession. Extending unemployment benefits for the long-term jobless, combating the stigma against hiring them, creating more on-the-job training opportunities and apprenticeships, and raising the minimum wage are all essential steps toward a more equitable distribution of the recovery’s benefits.
Laura Tyson, a former chair of the US President's Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley.
Trouble in emerging markets is unlikely to hurt the U.S. But America's companies may not be as lucky.
It has been a rough year so far for developing economies. Several, including Turkey, Argentina and South Africa, have seen sharp slides in their currencies. The Federal Reserve's reining in of its bond-buying program is causing fits elsewhere, and worries about capital flight have contributed to some central banks' recent decisions to raise interest rates. Signs that China's growth is softening, along with worries about the stability of the country's shadow-banking system, have added to the mix.
Although emerging-market woes have played a part in the drop in the U.S. stock market this year, worries they could cause serious financial-market problems in the U.S. have been subdued. Unlike the Mexican peso, Asian financial and Russian debt crises of the 1990s, banks' emerging-market exposures seem well managed. And investors have shied away from the types of heavily leveraged, multiple-country bets that led to the Fed-supervised bailout of Long-Term Capital Management in 1998. In her inaugural testimony as Fed chairwoman Tuesday, Janet Yellen said that the central bank isn't viewing the recent volatility in global financial markets as a threat to the U.S.
But while the possibility of financial-market contagion from emerging markets has lessened over the years, their role in the global economy has grown. Countries outside of the Organization for Economic Cooperation and Development nations that the World Bank classifies as high-income accounted for 61% of global gross domestic product, on a U.S. dollar basis, in 2012. That was up from 53% in 2000.
Precise numbers aren't available, but as emerging economies have grown, they have also become more vital to many large, public companies' businesses. General Electric, for example, made 34% of its sales outside of the U.S. and Europe in 2012 versus 17% in 2003. Caterpillar generated 36% of its total sales last year in Latin America and the Asian-Pacific region, compared with 21% in 2003. Countries outside of the U.S. and Europe accounted for 40% of Johnson & Johnson's sales in 2013, up from 17% in 2003.
A broad set of data from the Commerce Department on U.S. multinationals' majority-owned foreign affiliates paints a similar picture. In 2011, countries outside of the high-income OECD members accounted for 34% of sales at U.S. multinationals' majority-owned foreign affiliates. That compared with 25% in 2000.
Emerging markets' role in companies' expansion plans has been even more pronounced. In 2011, countries outside of the OECD accounted for 42% of capital spending at multinationals' foreign affiliates, compared with 30% in 2000. In other words, not only do emerging markets now represent a greater share of sales, they are where companies have putting bigger stacks of their chips.
Given the pace of emerging markets' growth over the past decade, and the promise of what they may become, it isn't hard to see why U.S. companies have done this. But there is a risk that in chasing growth they, and their shareholders, have lost sight of just how volatile emerging market economies can be. This year may serve as a reminder.
