Note on U.S. Growth

July 29, 2010

The Federal Reserve Beige Book gave a somber snapshot of the state of activity in June and early July.  The pace of activity slowed in the Fed districts of Atlanta and Chicago, stalled in the Kansas City and Cleveland districts, and and was modestly positive but not picking up further in other areas.  However competitive the United States becomes, personal consumption expenditures, which comprised 71% of 2009 real GDP, needs to perform better to achieve sufficient growth to address longer-term structural problems.  It’s unlikely to happen.

Consumption growth has been losing steam for some time.  Such expanded 3.4% per annum over the seven years 1994-2000 and 2.9% per annum in in the seven years 2001-7.  Then consumption contracted 1.4% per annum in 2008-09 and advanced only 1.6% between 1Q09 and the first quarter of 2010.

The massive destruction of wealth tied up in real estate and equities dealt households one enormous blow, but the beleaguered labor market poses the most concern going forward.  Jobs are marginally more than 27 million short of where they would be if their growth rate between end-1979 and end-1999 had been sustained in this century.  Firms remain very reluctant to hire, and haven’t reduced the rate of layoffs in a meaningful way since early December.  The latest four-week average of new jobless insurance claims, which captures changes in the layoff rate, was 452.5K per week, little different from the 36-week average of 460.9K.

The recession particularly clobbered Americans now between the ages of 59 and 67, who comprise a bit more than a tenth of the U.S. population.  This demographic layer represents the older half of the baby boomer bulge.  Many were in careers where no more positions exists.  The track record of job retraining programs for people of all ages is historically not especially encouraging, and that’s particularly true for older workers.  Even where age discrimination is not a conscious hiring strategy, the years of experience that workers have in a wholly different area tends to be outweighed by the lack of experience in the new field and the age of the candidates versus younger ones with experience.  Retirement is a time when savings are drawn down, and growth in spending exceeds income.  That life-cycle pattern will be blunted for these people, since savings will fall far short of expectations.

Fresh graduates in their twenties are the other demographical segment of the population whose career paths are under the greatest pressure.  Settling for much lower pay with considerable accrued school debt, many from this generation will spend a lifetime trying in vain to catch up, and their consumption patterns will never match the pattern of those who were born just ten or even five years earlier.

U.S. growth is projected to surpass growth in Europe and Japan during the coming three years, but labor market damage will constrain the United States to a lower growth trajectory than the one to which Americans since the middle of the twentieth century were accustomed.  Analysts are left to wonder how such a tragedy struck right in the middle of a golden age of productivity growth and to wonder if this is just a bitter coincidence or symptomatic of a blind spot in economic theory.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



Comments are closed.