It’s no secret that the U.S. economy isn’t doing especially well. But there’s a cliché – one that I’ve repeated myself – that conditions are improving, even if progress is disappointingly slow. That notion was exploded two weeks ago when the Department of Commerce estimated that GDP actually declined in the fourth quarter of 2012. It’s true that the drop wasn’t very big and was offset to some extent by better-than-expected results earlier in the year. But when you average results for the past four quarters, overall growth last year amounted to only half the normal rate, and there’s not really any upward trend.
Those results are even worse than they sound. After a recession ends, the economy typically enjoys a bit of a boom. And the deeper the slump, the more powerful the rebound usually is. For brief periods, GDP growth can get up as high as 9% (at an annual rate). And over several years, the economy can expand considerably faster than the historical average rate of 3.25%. In short, after a recession there’s typically a catch-up period, in which the economy makes up some of its lost ground.
So the problem is not just that business conditions are taking a long time getting back to normal. What’s a lot more disappointing is that there hasn’t been any real rebound at all. In fact, GDP growth hasn’t outpaced the historical average rate for two consecutive quarters since the recession ended. This chronic weakness isn’t result of any single problem. Instead, there are a host of factors that have combined to produce the entrenched stagnation we see today. Among them:
The housing bust. Home prices have stopped falling and have turned up over the past year. But many American families still have not recovered from the 30% drop in prices between 2006 and 2009. By some estimates, a fifth of all the homes with mortgages are worth less than is owed on them. Not only does this prevent many homeowners from getting home-equity loans to help sustain their spending. They also may be unable to sell their homes and move elsewhere to take advantage of job opportunities.
Restrained bank lending. The losses banks suffered during the recession depleted their capital and made them more cautious. As a result, lending still has not recovered to 2009 levels. To reduce the chances of future financial crises, regulators are requiring banks to raise more capital to back loans. While that will make the industry more secure in the long run, it may limit the amount banks are willing to lend while those higher capital requirements are being implemented.
Public sector layoffs. Although private-sector employment has been recovering since 2010, state and local government employment has been much weaker because of layoffs. These trends are likely to continue, especially if budget cuts lead to layoffs at the federal level as well. Estimates are that such cutbacks will reduce GDP growth this year by about a percentage point.
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Higher taxes. Raising taxes to reduce the deficit may be good for the economy in the long run, but in the short run every dollar removed from people’s pockets is a dollar that doesn’t get spent. The two percentage point rise in the payroll tax will have a direct negative effect on the spending of working Americans. Rough estimates of the overall fiscal cliff deal are that GDP growth will be reduced by about 1.5 percentage points this year.
The cost of Obamacare. Whatever the merits of the Affordable Care Act, it does raise taxes on high-income households by some $24 billion this year. Obamacare also increases costs for many businesses, and at some companies that will lead to layoffs or fewer new jobs.
Corporate cash hoarding. U.S. companies are holding as much as $1.8 trillion in cash. Corporate profits are high, and the economy isn’t growing fast enough to generate additional sales that would spur expansion. Companies therefore have little incentive to invest – if they do, it’s likely in order to cut costs, which may lead to fewer jobs. And badly drawn tax laws give multinationals an incentive to keep cash stashed overseas.
Euro zone troubles. European policymakers have become more optimistic about the outlook for the euro currency. And markets for the debt of troubled European countries are rising. Nonetheless, Europe is barely growing, and several countries – including Italy and Spain – are in recession. Even if the outlook improves, Europe will be a drag on the U.S. economy at least through 2013.
Other factors may play a part as well. Administration critics blame excessive regulation and uncertainty about future tax and budget policy for discouraging growth. But most of the things that are preventing a normal economic rebound are really beyond the government’s control, such as the state of the housing market. And as long as the federal government has to reduce the deficit – whether that is done by cutting spending or raising taxes – there will be a drag on the economy. It may indeed be true that the worst has passed. But slow growth seems likely to persist for at least another year – and perhaps longer.