U.S. Economy: Good News, Bad News
The strength of the United States rests with its economy. When good the nation prospers and wealth for all grows. When bad everyone suffers, especially the poor and middle class.
In case you haven’t noticed, the U.S. economy hasn’t been very good since 2007. But there is growing reason for optimism. There is also reason for worry.
The BEA recently upgraded GDP for the 3rd quarter to a healthy 4.1%. That is on top of GDP growth of 2.5% in the 2nd quarter of 2013.
On Christmas Eve the Wall Street Journal reported that orders for durable goods were up by 3.5% and that new-home sales hit a (reasonable) seasonally adjusted annual rate of 464,000 last month. The WSJ also reports that Macroeconomics Advisor adjusted its forecast for 4th quarter GDP growth upwards to 2.6%.
Equity market growth has been up in the stratosphere all year. Wall Street is living large.
No doubt the economy is improving. But there are dark clouds in the silver lining.
In particular, the Labor Force Participation Rate disturbs economists. It has plummeted since the beginning of the Great Recession and is showing no signs of recovery. The precipitous drop from 66% to 63% since 2008 represent a work force reduction of about 1.4 million productive workers.
The job market remains so bad that workers are giving up finding work and simply dropping out of the labor force.
That is not good. Fewer workers means fewer paychecks, less tax revenues, less demand to drive economic recovery and harsh economic conditions for a growing number of families.
The drop is partly driven by retirements due to the aging of America, but not all of it.
As of today, 1.3 million long-term unemployed Americans will lose extended unemployment benefits. By mid-2014, 1.9 million more will join them.
Because of that, the Federal Reserve Bank of Atlanta (FRBA) forecasts that the participation rate will suffer yet another drop in the coming year.
On balance, the affected individuals are likely to leave the labor force
– Federal Reserve Bank of Atlanta, 12/20/2013
The yields on U.S. Treasury 10-year bonds are rising. On Friday, yields closed above 3.0% for the first time since July 2011. Yields have doubled since it’s historic record low in 2012.
In some circles that is viewed as a positive sign of a stronger economy. Perhaps it is, but there are hidden effects that can put a serious damper on economic recovery and government services.
Higher yields means higher home-mortgage loan rates, business loans and the cost to the federal government for borrowing money.
The ignored elephant in the room is the national debt. It is $17.2 trillion and rising. It has nearly doubled since the beginnings of the Great Recession in 2007. Historic low yields since then have kept it manageable.
Since 2006, the yearly interest paid on the national debt has fluctuated around $400 billion/yr even as the debt itself has doubled. But when 10-year yields return back to their pre-recession average of 4.5% from years under 2% then interest costs will more than double current levels.
Take upwards of $1 trillion dollars out of the economy just to pay the yearly interest on the national debt in a few years and that will put a big damper on the government’s ability to provide citizen services, pay for entitlements and will drive up interest rates for everyone and everything.
No doubt, the economy is improving. There is positive GDP growth and other important economic indicators are looking up.
But can it be sustained? What will be the long-term effect of declining workforce participation? Will both supply and demand simultaneously be reduced because of it? Where will the jobs come from to sustain families?
What will be the effect of $4 trillion in Fed asset purchases added to its balance sheet fighting the Great Recession? What will be the effect on servicing a doubled $17.2 trillion national debt as U.S. Treasury bond yields slowly return back to normal levels?
Whether or not things go up or down from here is a toss-up.
Lets hope that private-sector economic growth finds a way to outpace the headwinds generated by decades of reckless government spending.