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A Midyear Economic Review: A Mixed Outlook

The U. S. economy continues to expand at what has become a now familiar slow steady rate. This performance, however, is subject to a number of different and often contradictory interpretations. At the national level, the Obama administration has cited as its major accomplishment the seven-year expansion after the 2007-2009 recession and the recovery from the 2008 financial crisis along with the decline in unemployment from 10 percent in 2009 to its current level below 5 percent. During this period, the U. S. economy has weathered a number of challenges to remain among the strongest in the world. Good luck played a role as well with the fall in energy prices resulting from the fracking revolution that occurred without the support of the administration.

These achievements have not convinced some Republican and Democratic critics that all is well. Clearly the end of the financial panic and the resulting expansion has been welcome, but the recovery has been feeble by historical standards. The growth rate of GDP the last 7 years has been unusually slow in comparison to other postwar recoveries, hovering around 2 percent per year. By comparison, the yearly growth rates after the recessions of the early 1980s and 1990 were often well above 4 percent. This has resulted in slow wage growth and an actual decline in median real household income this century.

One explanation of the recent weakness suggests that the disruptions associated with the financial crisis were especially severe thus leading to an anemic recovery. Conservatives argue that this was exacerbated by the uncertainties created by the advent of Obama Care and a more restrictive regulatory regime.

Some analysts are even more pessimistic, suggesting that the recent economic performance is not an aberration, but a kind of new normal characterized by the term secular stagnation. They suggest that the century of unusually strong growth during the 100 years from the late 19th to the late 20th Century (characterized by 3 percent growth) is not likely to be repeated in the future.

Secular stagnationists assert that innovations that spurred development in this period such as electrification, automobiles, airplanes, telephones, radio, television, motion pictures and public health advances are not matched by current innovations in computers, communications, and health care. Optimists counter with predictions of a resurgence of growth from unexpected advances in artificial intelligence and other unexploited technologies.

Slow growth is not the only concern of critics, especially those on the left. Increasing economic inequality has become a major theme that dominated much of the Democratic primary campaign. In some ways, this is odd since Hillary Clinton's campaign is sometimes characterized as an Obama third term even though the Obama administration presided over marked increases in measured inequality (that also occurred during the two terms of Bill Clinton). The Obama years may well close with the largest percentage increase of stock prices on record. The problem that must be faced in the future is that policies that attempt to reduce inequality such as more progressive taxation, more government spending and more intrusive regulation may work against stronger overall growth. Reducing inequality is not costless.

In summary, the short term picture for the U. S. economy seems to be more of the same-no recession and continued slow growth. Given the turmoil in the world economy, this is not all bad. The performance (if not the structure) of the U. S. economy is still the envy of much of the rest of the world. Not surprisingly, the long run outlook is more clouded. There is no assurance of a return to historic growth rates. Further, the two presidential candidates with their proposed retreat from the world economy are not the source of optimism.