The U.S. officially emerged from the Great Recession in June 2009, yet the recovery has not significantly improved the everyday lives of most citizens. Six years later, the economy seems to plod along like a stubborn mule navigating a treacherous, muddy path.
Though there are moments of progress, setbacks often follow. Each step forward carries the risk of slipping off the precarious trail and plunging down the steep cliffs that loom nearby.
Currently, the U.S. consumer, traditionally viewed as the powerhouse of economic growth, is struggling. The University of Michigan’s Survey of Consumers recently highlighted a drop in its consumer sentiment index to 85.7 in early September. This figure fell from 91.9 just the previous month, marking its lowest point in a year.
Producer prices also reflect uncertainty. The Labor Department reported a decline in the producer price index for seven consecutive months on a year-over-year basis. This trend suggests the economy may indeed be stagnating.
Contrarily, some positive indicators exist. As of August 2015, the unemployment rate has dropped to 5.1 percent, notably below the historical average of 5.6 percent. Shouldn’t this low unemployment rate signal a thriving economy?
Working for Less
On the surface, these figures might suggest a healthy economic environment. However, a deeper examination uncovers more troubling realities:
The labor force participation rate, which represents the percentage of the working-age population either employed or seeking employment, stands at 62.6 percent. This is the lowest it has been since the late 1970s, indicating that 37.4 percent of the working-age population is not currently employed.
It’s unclear why this large segment is not working. Are they independently wealthy, thriving on eBay sales, or simply resting at home? The answers remain elusive. What is certain is that they are not part of the workforce.
Among those who are employed, wages have stagnated. The U.S. Department of Commerce has shown that, when adjusted for inflation, median household income is 8.7 percent lower than its peak in 1999, indicating that this economic recovery has not translated into improved earnings for the average American family.
Thus, in the face of a relatively low unemployment rate, fewer people are working—and those who are employed are earning less. Is it any surprise that consumers are hesitant to spend what little money they have? Many are already stretched thin, unable to take on additional debt.
The Prelude to QE4
The crux of the issue is that nearly seven years of aggressive Federal Reserve policies haven’t yielded the expected economic outcomes. This is evident and widely acknowledged. Yet, the decision-makers in charge seem unable to pivot from their current course, seemingly intent on driving the economy further into disarray.
Recall that the Zero Interest Rate Policy (ZIRP) was anticipated to produce miraculous results. Though specific details might escape us—December 2008 feels distant—the intended effect was clear: affordable credit would incentivize borrowing and spending, leading to increased production, job growth, and rising incomes for all.
However, the reality diverged sharply. While the real economy has struggled, financial assets—particularly stocks—have risen dramatically. A bull market fueled by cheap credit can be exhilarating, but it is also highly disruptive. History tells us that after a boom, a bust is often due.
Later this week, the Fed is expected to announce whether it will finally raise the federal funds rate as previously indicated. Wall Street seems to hope they will delay this decision, fearing that a combination of inflated stock prices, a lackluster economy, and the end of ZIRP might significantly hurt financial markets.
Indeed, a decline in stock prices might reset some imbalances. So, why resist this possibility?
Moreover, if the Fed refrains from raising rates, the same discussions will reoccur ahead of the next Federal Open Market Committee (FOMC) meeting in late October. Or perhaps not, as stock markets could experience a downturn even if interest rates remain near zero. This current FOMC meeting might just be the precursor to QE4.
It seems the authorities have yet to learn from past mistakes. Prepare for continued market turbulence in the weeks to come.
Sincerely,
MN Gordon
for Economic Prism
