August 3, 2012

Why isn’t the economy bouncing back faster?

By Glenn

Why isn’t the economy bouncing back faster? This graph helps you understand what is happening. It uses the number of jobs in September 2008 as the benchmark. This was the month the financial markets crash started. On the chart that job number equals 100. Then it charts percentage changes in each employment section against that number.

Two lines tell the story: declining government jobs and a weak construction sector.

You can see that in the first year there was an overall decline in almost every sector except the government jobs and Education/Healthcare 9unfortunately these are lumped together). The sharpest declines came in Construction, Mining (includes drilling) and manufacturing. These industries saw a rapid decline in consumer demand as the markets crashed. Education and health care were protected as necessary government spending continued. Take this away and things could have been much worse.

Mineral production–coal and oil—bounced back the fastest. This too is related to necessary spending. We have a machine driven economy, and consumers can only cut back so much. Other industries like “information” were not necessities and have stabilized at a level 10 to 20 percent below pre-crash levels.

On the other hand, manufacturing and construction remains down. Consumers are delaying big ticket items like cars because of job uncertainty. Who wants a new car payment when they might lose their job next month? Imagine you are a teacher, police officer or fire fighter and you hear calls for budget cuts. Do you make a big purchase or wait? I would wait. Most rational people do.

Construction also has a special problem. Consumers “invested” in new houses at a record pace during the 2000s. Too many of them found themselves owing more than their house was worth. They can’t sell their house and move to a new city for a job. Instead, they have to pay down their debt (deleverage) before they can make a new home purchase.

This behavior creates an incredible weight that holds the entire economy back. New home sales often spur other purchases. New homes need refrigerators, washing machines, TVs, beds and many other smaller items. People in older homes will replace a broken item, but they rarely replace everything at once.

Add to this the fact that many young adults have large amounts of student loans. This is also new. Previous generations of college student enjoyed a heavily subsidized education. In the 1980s state governments covered as much as 80% of the costs. Today that is shrinking to less than 40% in most cases. Instead of building a ladder for the next generation to climb, selfishness is burning it. This selfishness not only hurts the individuals but it is also retarding the economic recovery.

Finally, you can see for yourself that government jobs started to decline in the middle of 2010. This is also new. In the post-World War Two era government jobs had never declined in a recession. Even in the Reagan era the federal government INCREASED defense construction spending and local governments, with aid from Washington, maintain their highly skilled workforce.

So why is this economy different? 1) The financial collapse uniquely crushed the construction industry. Until something is done to drive down consumer debt, consumers can not return to their role driving economic growth. 2) Cuts in government spending and employment are making things worse. There is no way to grow an economy by subtracting. Growth requires addition. It is simple math.

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