That’s a question that’s on a lot of people’s minds these days. There are signs of improvement in the economy, but there are an equal number suggesting that we’re doing little better than bumping along the bottom. News reports don’t seem to be adding any clarity to the situation either. Superficially, the statistics are definitely pointing toward improvement, but secondary numbers often tell a very different story.
Let’s take a quick look at the evidence and arguments for both better and worse in the economy for 2013.
Signs the Economy is Getting Better
It seems as if all indicators that have a number attached to them are pointing toward a better economy. There’s been steady improvement across the board since the recession hit bottom in 2009.
Unemployment is dropping. In the most recent report, unemployment has fallen to 7.6%, down considerably from the Great Recession peak of 10.0% in October of 2009 (though technically the recession ended in June of 2009).
GDP is reflecting growth. For better than three years the gross domestic product (GDP) of the U.S. has been reflecting steady if unspectacular growth, ranging from 1.6% to 2.8% per quarter. It’s been strong enough to generate job growth and increase corporate profits without igniting inflation or causing interest rates to increase.
The housing market is showing definite signs of recovery. According to Zillow.com, house prices rose by 5.9% in 2012, and are projected to rise an additional 3.3% in 2013. In addition, the number of foreclosures is in sharp decline.
Look at that stock market! The Dow Jones Industrial Average (DJIA) currently sits well above the 14,000 level. At the bottom of the last stock market crash, in March of 2009, the Dow dropped as low as 6,547. Translation: The Dow has more than doubled in just over four years.
Why the Economy May Actually be Getting Worse
Once we get past statistics, and even if we take a deeper look at those, the story gets more complicated.
There’s still too much stimulation required. We’re into the third round of quantitative easing, also known as QE 3, and this one was only started in December of 2012. Under this program, the Federal Reserve (the Fed) is buying up to $85 billion per month in U.S. Treasury securities and mortgage agency debt in an effort to keep interest rates at near zero levels. We should be asking why such an initiative would even be necessary if economic growth is so solid.
Record low interest rates are telling a very different story. Continuing on that same theme, interest rates are not just low, they’re as low or lower than they were in the depths of the Great Recession, and lower than they were during the Great Depression of the 1930s. These are the kind of rates that the central bank would only implement during a very bad economy. Normally, after four years of steady economic growth, interest rates would be rising as inflationary pressures and demand for credit build. Neither is in evidence.
There are some things the official unemployment number is hiding. The recent improvement in the unemployment rate seems to be even more significant for what it doesn’t reveal. The rate has mainly been falling because potential workers are dropping out of the workforce, far more than because of the creation of new jobs. In March of 2013, the unemployment rate dropped from 7.7% the previous month to 7.6% – not so much because the economy created 88,000 new jobs, but more because nearly 500,000 workers left the job market.
This is a trend that has been going on since the labor participation rate peaked in 1979. As recently as 2000, the rate stood at 67.3%, but is now down to 63.3%. In addition, there is increasing focus on the under-employment rate. This includes people who are working part-time but want to work full-time, and this percentage is somewhere in the 14% range.
The housing market is still weak. While the housing market is showing improvement overall, much depends on location. The fastest price appreciation is taking place in markets hardest hit by the financial meltdown, and may be more a bump off the bottom than anything else. In many markets, price levels are stagnant or continuing to fall. And we have to ask the question, with mortgage rates below 4%, why isn’t the housing market booming across the board?
What does this all mean?
We’re looking at very mixed signals on the economy. While it’s certain that economic conditions are better than they were in 2009 or 2010, the improvement is far less than spectacular. This recovery is moving at a much slower pace than previous recoveries, which is all the more apparent since the last recession was so much worse than it’s predecessors.
There is also the emotional factor – this recovery just doesn’t feel very solid. Job creation is weak outside government, education and healthcare, and job security seems non-existent. Meanwhile, the fiscal cliff tax increases have yet to be fully felt in the economy, and the federal government continues to run on trillion dollar deficits. None of that is the stuff of booming economies, and would seem to leave us in a weakened state going into another recession – which always seems as if it’s right around the next corner.
What are your thoughts on the economy this year? Better, worse – or something that’s beyond logical explanation? Leave a comment!