The recession seemed to come on so quickly, and yet the recovery seems to be slow catching on. Why does it feel like we’re still in a recession?
Overall, GDP growth in 2013 was subpar with 2% growth. This is below the historical norm of 3%, and it’s been several years of under 3% growth. As you can see in the chart, last year GDP growth has not been anything to write home about.
The U.S. economy is expanding, the stock market is breaking records, the global economy is doing better, state economies in the region are doing better, and all that is expected to continue in 2014. So, why do most Americans still think we’re in a recession?
After all, the economy is technically growing — slowly, imperceptibly, like watching grass grow. As you question the recovery, what most are experiencing upon closer inspection is what many analysts call a “balance sheet recession.” That means that just about everybody in the Western World — households, corporations, and even governments – are focused on paying off our balance sheets (paying off debt) at the same time. That’s nice for our balance sheets. But it’s a horrible way to jumpstart a weak economy. The lack of confidence in our economy is apparent as you watch Congressional budget debates, and watch consumer and business spending slow or halt during those discussions. In any type of recovery, physical or economic, slow and steady is the recommended solution. Any exceptions to that tend cause concern, particularly when we are recovering from loss of over $7.8 trillion in net worth nationally. Businesses and consumers are not ready to jump in with both feet it appears.
Remember, between the technology bubble and the housing bubble that book-ended the 2000s, households and business borrowed lots of money, year after year. Then the recession hit, and our incomes fell, and we started savings and running surpluses by saving more of our money. The Baby Boomers were not near the savers their parents and grandparents were until the recession hit. When you are not sure or optimistic about the economic future, we have been taught to save.
Also remember nationally, after the tech bubble, the U.S. economy relied on Americans buying more houses — and more expensive houses — than ever before. Today, Americans are buying the fewest number of homes in 60 years, a fifth of homeowners are underwater, and savings rates have shot up. Deleveraging created a whopping 9-percent-of-GDP shift toward savings in the private sector. Meanwhile, the public sector’s borrowings offset only about two-thirds of that shift.
So what is slowing the recovery? One of the main factors is unemployment, long term and short term. This recovery just does not have the feeling of improvement, even though unemployment has been declining measurably – from 10% at its peak to 6.6%. But if you look at the employment rate – not the unemployment rate – you see how few in the adult population have jobs, and we have not made any progress since the recession began. We are only at 58% of the adult population working now, same as it was in the depth of the recession, and well below the historical trend of 63% nationally.
Unemployment until this last December has been above 7 percent for over 4 years, above pre-recession levels for over 5 years, and isn’t likely to return to those levels for a few more years. Wages are not keeping up with inflation or appreciation. A great example is Austin, where over the last 5 years rents have increased 58%, real estate residential appreciation 38%, while wages have been flat. Austin, as good as it seems to be doing, is a microcosm of the national economic picture. The ability to spend more is tapered by the inability to make more in many jobs.
The U.S. economy continues its slow walk back to pre-recession levels, with unemployment being among the slowest of indicators to return. Household median income has declined over 5 percent since the meltdown. While higher-wage occupations have generally recovered, mid-wage occupations have not. Instead, the growth has been in lower-wage occupations. This is forcing many Americans to lower expectations about lifestyle and living standards.
If you look at the chart below you see that this recovery has been slower and longer than previous economic slowdowns.
Then there is the consumer spending piece of the puzzle. Consumer spending has been slow. Consumers and most business are still cautious and less confident about the economic recovery. There are plenty of conflicting indicators about what is happening in the U.S. economy, with booming sales of cars and houses seeming to be offset by sluggish spending in retail, stores and restaurants. The good news is that people are showing more confidence in making longer-term, big ticket purchases than they are in loosening up on their day-to-day spending over the last year. But there also is a need nationally for retail spending to pick up.
One of the many economic indicators that I watch personally is how women are spending. Since many women who are married also manage the budget (and even if they don’t), they spend money on themselves last in the family budget. A great example is the lipstick index, first suggested by Leonard Lauder, chairman of Estee Lauder. The index shows that women turn to lipstick instead of more expensive indulgences like handbags and shoes during hard times. You always have your exceptions to every rule, but in my 35+ years of following the economy, when women’s retail chains and stocks begin to pick up, it is a good sign. For most of last year we began to see that spending indicator. Unfortunately beginning with budget impasse, it has plateaued.
That can be seen in business spending, too. Historically business investment should follow profit, but that’s not happening. Profit is up but businesses aren’t spending. It implies that businesses are uncertain about the near future. That said, if you look at small business optimism index, 2014 shows optimism and potential growth (small business make up 80+% of our national GDP). But again, what we are seeing is the lack of confidence in long term economic growth presently.
Despite the lack of confidence and the hollow unemployment rate improvement, most economists and analysts still expect growth through 2014 into 2015. Just not the robust growth everyone wants and remembers from pre-recession days. The good news is the economy is expanding. Most analysts expect 2.5% GDP growth this year. In the 4th quarter 2013, growth was solid but that was one quarter. We need that rate to be consistent for four quarters.
So, how do we grade out?
Nationwide – C+
The Federal Reserve lowered rates, and is planning to let rates increase as housing and job growth historically follow. When the rates are at zero, the Federal Reserve uses other means, such as quantitative easing (QE) to encourage growth. It has been by most measurements mildly effective. As the Fed reduces stimulus, then rates will rise, which in turn causes concerns on home affordability. Historically as rates rise, sales slow, then pick up as businesses and consumers realize that rates won’t go down much once they begin to rise.
Texas – B+
Supply and demand is in balance, and home/land value appreciation meets or beats inflation. Employment growth, lack of business regulation, and low tax burdens all have helped. The attention Texas has gotten from its economic performance compared to other states means it is being seen as the new ‘land of growth’.
Austin – A
So much has been written about the strength and success of this market. Job creation and housing formation as well as other real estate channel demand exceeds supply. Housing and real estate appreciation is stronger. Most of the area concerns are caused by the strength and demand of the market. After the tech bubble burst, local civic leaders got together to plant a broader economic base for growth. This blueprint has allowed tremendous ‘buzz’ and goodwill in attracting talent and jobs.
Houston – A
Like Austin, after the energy and tech busts, local leaders looked to improve and broaden their economic footprint. What has ensued is a city that has felt very little of the national recession. The housing formation as well as other real estate channel demand exceeds supply. Through 2014-15 housing and real estate appreciation will continue to gain strength.
DFW – B
Dallas / Fort Worth is much more dependent on the national economy, therefore the recession hit them harder than the other city their size in Texas. They just began to feel the recovery in the beginning of 2013, unlike the rest of the state. The good news is that demand has picked up, putting pressure on supply in most channels. Not quite as robust as Houston or Austin, but getting there.
San Antonio – B-
San Antonio had been doing better until last year, when the Congressional sequester and defense budget cuts hit. Over 90,000 civil defense jobs were lost in Texas. This hit El Paso, Killeen and San Antonio hard where there is such a large military presence. That said, they still had a net positive of 8,000 jobs in a market that remains tight in all residential channels. Economic recovery potential remains strong as most brokers see greater housing formation than inventory.
Key indicators are generally positive nationwide, again with the Oklahoma-Texas region leading. Regional GDP will grow, unemployment will continue to decline, business investment and consumer spending will grow, no matter what people are feeling.
Inflation and interest rates will see slight increases. Agricultural production and income will be down slightly in the region while the natural resource sector will likely see a steady rise. Regional wages will also likely be steady to up. Unemployment will continue its slow decline.
This continued level of uncertainty suggests the continued importance of risk management and longer term strategic planning. With 2014 as a mid-term election year, it is unlikely that the rhetoric of politics will be dialed down. Not just the economists and analysts, but all of us will need to be keen on interpreting the facts from spin, and how such information is likely to effect our economic realities.