The recent payroll gains and the declining unemployment rate in the United States have raised hopes that the economy will now start growing faster than the tepid 1.7 per cent rate of last year. Optimists are expecting growth rates as high as three per cent for this year and next.
I hope they are correct. The recession that began in December 2007 was deep and painful and the recovery that began in June 2009 has been slow and grinding in spite of unprecedented fiscal outlays and an even larger monetary stimulus. House prices have continued to fall and housing construction remains dormant because of the Obama administration’s failure to reduce the large number of homeowners whose mortgage debt exceeds the value of their homes. Business investment has been depressed by the anti-business rhetoric and policies of Mr Obama’s government.
While payroll employment has been rising by more than enough to absorb the growth of the labour force, the expansion in gross domestic product has been weak and most of that increased production has gone into inventories rather than into final sales to households, businesses and foreign buyers. The latest official estimate indicated GDP grew at 3 per cent in the fourth quarter of last year but final sales constituted only 1.1 per cent of that, with the rest going into inventories. Estimates by Macroeconomic Advisers for January indicate an annualised GDP growth rate of 2.5 per cent, but also suggest that final sales declined.
The jump in the consumer price index for February resulted in real average hourly earnings falling in that month. Higher prices and falling real incomes caused the Michigan consumer sentiment survey to decline this month.
Looking to the future, there are strong headwinds that will make it difficult to achieve a robust recovery. Higher petrol prices will reduce real incomes and cut spending on domestic goods and services. The weaknesses in many European economies will lead to reduced US exports to those countries.