economy now

http://www.j-bradford-delong.net/movable_type/ Jan 14 2005

The indispensable Economic Policy Institute has produced a crisp one-page summary supporting this viewpoint. Here are some choice excerpts:

Profits are up, but the wages and the incomes of average Americans are down.

--Inflation-adjusted hourly and weekly wages are still below where they were at the start of the recovery in November 2001. Yet, productivity--the growth of the economic pie--is up by 13.5%....

--Consequently, median household income (inflation-adjusted) has fallen five years in a row and was 4% lower in 2004 than in 1999, falling from $46,129 to $44,389.

More and more people are deeper and deeper in debt.

--The indebtedness of U.S. households, after adjusting for inflation, has risen 35.7% over the last four years.

--The level of debt as a percent of after-tax income is the highest ever measured in our history. Mortgage and consumer debt is now 115% of after-tax income, twice the level of 30 years ago....

--The personal savings rate is negative for the first time since WWII....

Rising health care costs are eroding families' already declining income.

--Households are spending more on health care. Family health costs rose 43-45% for married couples with children, single mothers, and young singles from 2000 to 2003.

--Employers are cutting back on health insurance. Last year, the percent of people with employer-provided health insurance fell for the fourth year in a row. Nearly 3.7 million fewer people had employer-provided insurance in 2004 than in 2000. Taking population growth into account, 11 million more people would have had employer-provided health insurance in 2004 if the coverage rate had remained at the 2000 level.

Summary

On December 8, the Federal Reserve released a new report, The Flow of Funds Accounts of the United States, a quarterly statistical depiction of financial flows and holdings across the country. The report tells the tale of two economies: one drowning in debt, the other overflowing with so much cash that it doesn't know what to do with it.

For families:

• Record debt. Household debt is at a record high (121.2 percent) as a percentage of disposable income. This means that families are more burdened by their debt than ever before.
• Record reductions in home equity. Families have cashed out more home equity than ever before, $113 billion in the third quarter alone. This means families are financing more of their consumption by reducing their home equity-a trend that is not sustainable without further wage growth.

For companies:

• Highest cash holdings in nearly 40 years. Corporate cash holdings totaled 6.2 percent of their assets in the third quarter of 2005. Cash holdings for the last four quarters are at their highest level since 1966.
• Less investment. Instead of using the additional resources generated by high profits for productive investments, corporations are using their money to spread the wealth to their shareholders. Typical mechanisms are dividend pay-outs and share repurchases that help to boost share prices. Fewer dividend pay-outs relative to corporate profits have been largely compensated for by higher share repurchases.

the employment to population ratio is still 1.7 percentage points below its 2000 average, the equivalent of 4 million fewer people holding jobs.

Over a similar period in the last recovery, payrolls grew by nearly 300,000 per month. Thus, while the U.S. labor market is consistently generating job growth, the pace remains below that of past recoveries. For example, payrolls grew by 2 million jobs in 2005 (December 2004-December 2005). Over a similar period in the last recovery, payrolls grew by 3.5 million jobs. In percentage terms, payrolls grew 1.5% over the past year. The average over prior recoveries that lasted at least 49 months is twice that rate at 3.1%.

Comparing job growth in the current recovery to past recoveries of equal length (at least 49 months), job growth in the current recovery is the slowest on record:

Percent change in payroll employment, first 49 months of recoveries