We Need a Recovery to Recover From the Recovery

Four years into the "recovery" it is unacceptable that the levels of industrial output, employment and real incomes remain below prerecession peaks.

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Millions of Americans think the economy is in decline. They are right. The U.S. economy is visibly losing momentum. There is small consolation in the fact that Europe is in worse shape, enduring the longest recession since the eurozone was formed 13 years ago. Even Germany struggled to achieve 0.1 percent growth in the first quarter. U.S. growth has averaged just 2.2 percent since the recession ended four years ago, but that is nothing to write home about since it is barely half the 4.2 percent average of the seven previous recoveries. And the prospects are disheartening. The response of GDP growth to policy stimuli is about half what it usually is, even though the fiscal and monetary stimulus has been the greatest in 75 years. Our economy is simply not healing in the way it used to and in the way it should. We need a recovery to recover from the recovery.

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The story is that, despite pockets of strength, the economy as a whole cannot gain real momentum and enjoy what is called "escape velocity." The millions of Americans who are unemployed or underemployed are pessimistic and even frightened about their future. Those who have jobs worry about losing them. Fewer Americans are at work today than in April 2000, even though the population has grown by nearly 30 million people since then. Millions of homes have been foreclosed. Even with the modest recovery in recent years, the burst of the housing bubble in 2006 and the reverse of the bull market in 2007 drove a $5 trillion hole in household balance sheets that is the most painful since the 1930s. No wonder the Pew Research Center has reported that the share of Americans calling themselves middle class has declined over the last four years from 53 percent to under 49 percent.

There is a bright spot, of sorts. The federal deficit is headed to 4 percent of GDP, less than half the 10 percent of 2009. But there is practically no oomph in growth. And the squeeze of sequestration, the end of the payroll tax holiday, and individual tax increases mean growth is further at risk. The output gap is close to 6 percent of GDP, so it could easily take five years or longer to absorb excess capacity. This means we may well be living with disinflationary or deflationary factors over the next five years.

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On average, over 60 percent of the incoming economic indicators have been below consensus, and whenever GDP growth has slowed to an annualized level of about 1.7 percent or less, the downtrend has never failed to slip into a contractionary phase.

The most serious weakness we face is the lowest level of private sector capital investment in six decades, bringing with it the first decline in U.S. productivity since the 1970s. Structural productivity has also been limited by the near-record number of long-term unemployed. The problem here is not just layoffs but an acute mismatch of skills. Cherished skills have eroded long enough to be no longer relevant, and we've created far too little real opportunity for people to acquire new ones.

The labor force participation rate is thus now down to 63.3 percent, the lowest level recorded in more than 30 years. Remarkably, according to David Rosenberg of wealth management firm Gluskin Sheff, some 90 million Americans have withdrawn totally from the labor market. How are they getting by? On food stamps, welfare and federal disability subsidies, as well as extended unemployment insurance and strategic defaults in the housing sector.

America the Beautiful is a country where 23 million households (or some 48 million people) now need food stamps, representing almost 15 percent of the population and 30 percent of adults. Add to that some 11 million Americans who live on disability benefits. It is hardly surprising that there is so little incentive to invest in new plants and equipment. Capital spending remains one of the most critical missing links in our tepid recovery.