America’s economy: finally a turn for the better

After four years of ups and downs (but mostly downs), in recent weeks, the US economy has begun showing more reliable signs that it might finally be on its way to a full recovery. Several key indicators – from the unemployment rate to small business owner confidence – are starting to look good.

Besides being welcome news for the country as a whole, this development bodes well for President Barack Obama, whose chances of re-election in November are closely tied to the state of the economy. Still, the US economy is not out of the woods yet. Despite this latest bout of progress, growth remains fragile and could easily be undone by new shocks to the global financial system. A sudden worsening of conditions in the eurozone, for example, could yet prove significantly detrimental.

Additionally, the stalemate between Democrats and Republicans in Congress is likely to deny the economy the kind of interventions still needed to really kick it into full gear. Although an agreement was reached last week on a ten-month extension of the payroll tax cut and unemployment benefits, many fear this might very well be the last thing the 112th Congress manages to do before a new one is inaugurated next year.

Positive signs for the US economy are coming from all sectors. Industrial output grew 0.7% in January, after a 1.5% increase in December, the Federal Reserve reported. The quintessential American car manufacturer, Detroit-based General Motors, posted record profits in 2011 ($7.6 billion,) only a year after coming out of bankruptcy protection. The beleaguered real-estate market also saw improvements, with home construction increasing 1.5% in January, according to the Commerce Department. Even the Dow Jones industrial average has been rising to highs unseen since 2008, coming remarkably close to the 13,000-point mark.

At the same time, the number of Americans filing for jobless benefits declined to a four-year low in mid-February. More importantly, the unemployment rate dropped to 8.3% at the end of January, the lowest it has been since February 2009.

Small-business owner confidence has also been on the rise. The optimism index posted by the National Federation of Independent Business grew 0.1% in January, the fifth consecutive increase in five months. The same goes for feelings among the general public. According to Gallup, Americans’ confidence in the economy reached an eight-month high in January.

The only indicator still lagging is consumer spending. Retail sales grew last month, but by less than had been expected.

Given this context, it is no surprise that President Obama’s approval rating is on the upswing. “With the economy, the president always gets credit or blame,” says Larry J. Sabato, Director of the Center for Politics at the University of Virginia. “The chances of him losing the White House increase with any negative economic news. On the other hand, if the economy improves, the election may not be as close as we expect.” According to several polls, Obama recently managed to climb back to a 50% approval rating, after months well below that magic number.

“The recovery appears stronger that it looked last spring and summer,” says Gary Burtless, senior fellow in economic studies at the Brookings Institution in Washington, DC. “Still, the economy is weaker than it was at this stage of the recovery in any previous post-war recession/recovery cycle.”

One chief concern among economists in the United States is the fear that Europe will fail to positively resolve its financial crisis, which could seriously jeopardize recent progress at home. A disorderly default in Greece (or one of the other bigger members of the European Union) could have spillover effects on American financial institutions and trigger a new drop in consumer and business confidence (although a growing number of experts are convinced that the US is slowly insulating itself from the difficult situation in the eurozone.) An eventual burst of the housing bubble in China would also provoke damage in the United States, and is a source of worry.

A threat that is closer to home regards the finances of local and state governments, which are now feeling the pinch from the crisis and are trimming spending. With federal stimulus funds running dry, in fact, states and cities now have to make do on their own. According to an analysis by USA Today, the results include: layoffs (668,000 workers), a reduction in infrastructure investments (a 4% drop in both 2010 and 2011), and cuts in health care spending on the poor.

There are a number of things that Congress could do to bolster the current recovery and make it last longer. “It should certainly be borrowing more funds for public infrastructure investment,” says Burtless from the Brookings Institution. The borrowing costs for the US government are now at historic lows – near zero in fact. And there are a lot of idle workers and idle equipment. “Why aren’t we making these investments, under the most favorable conditions I can imagine? I don’t really know.” 

The answer mostly has to do with the fact that a deeply divided Congress has been incapable of agreeing on pretty much anything for the last two years. Republicans, indeed, remain adamant that government should have little to no role to play in the running of the economy. (Mitt Romney continues to argue that even the rather successful auto-bailout was a bad idea.)

To give credit where credit is due, an exception was made last week, when, after months of squabbling, Republicans and Democrats came to a compromise for a ten-month extension of jobless benefits and the payroll tax cut (from 6.2% to 4.2%). The $150 billion deal was mostly crafted along lines drawn by the Democrats. There will be no spending reductions to offset the cost of the payroll tax cut but only some to balance out the extension of unemployment benefits (and a fix to Medicare payments to doctors.) “In an election year, electoral math outweighs policy implications,” says Professor Sabato of the University of Virginia. “The GOP has decided to compromise over these issues to give themselves some protection for November.”

Precisely because of the looming November elections, this rare compromise is about as much as anybody expects from Congress this year. “Everything else is a pipe dream,” says Heidi Shierholz, an economist with the Economic Policy Institute in Washington, DC. And it’s not much either: “These measures were supporting the economy anyway; extending them into the future is not going to push things forward,” Shierholz says. 

Between the partisan deadlock and electoral preoccupations, Congress is not going to help much: if the economy really wants to get better, it will probably have to do it on its own.

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