YOU DECIDE: What’s holding back the economy?

Date posted: June 10, 2011

Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.

Media Contact: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

By Dr. Mike Walden
North Carolina Cooperative Extension

Spring brought hot temperatures to much of the country, but it also brought a cool economy. Hopes for a more robust recovery making significant inroads against unemployment seemed to have been dashed in recent weeks. Some analysts are again talking about a “double dip” — meaning a slide back to negative growth — or even worse, a depression.

So it’s time to hit the pause button and make an assessment of where the economy has been and where it may be going.

Let’s first look at where the economy has been. The good news is that for almost two years most of the economic indicators have been pointing up. Factory production has risen 11 percent since mid 2009, and a comparable measure of the sales of service firms has also improved. In fact, the broadest measure of our national economy — something called “gross domestic product,” or the value of everything produced and sold — has now returned to pre-recessionary levels.

But what about what matters most to households and families struggling with the economy: jobs? Actually, the country has gained jobs in the last almost 18 months. Since the national job market hit bottom in February 2010, 1.8 million jobs have been added. The gains have all come in the private sector. In fact, since February of last year, 300,000 government jobs have been cut, meaning private businesses have added 2.1 million jobs since that time.

Yet these gains haven’t been enough to put all who have lost a job back in the labor force. The national unemployment rate is still over 9 percent, and there are 6 million fewer jobs today than before the recession.

There have been similar job trends here in North Carolina. More than 44,000 jobs have been added since February 2010, all of them in the private sector. But we are still short 280,000 jobs in the state compared to prior to the downturn.

At this rate, it will take several years to recover the jobs lost during the recession. And the scary thing is, in recent weeks it looks like the pace of economic improvement has slowed. In the nation, only one-quarter the number of jobs were created in May as were added in April. The rate of job growth has also dropped in North Carolina in recent months.

Some economists say not to worry; the slowdown is temporary. They point to two hits the economy has taken this spring. One was the Japanese earthquake, which interrupted the production of many automotive and electronic products and affected worldwide sales, including in the U.S.

The other was the almost $1 per gallon jump in gas prices in late winter and spring. Consumers had to spend more money filling their tanks, leaving them less to spend at stores, malls and shopping centers. The result was a decline in spring retail sales and, because consumer shopping accounts for the majority of economic activity, the consequence was a sputtering economy.

However, now those two negatives have been turned around. Factories are returning to normal in Japan, and gas prices are dropping. Therefore, those with a more optimistic outlook think the economy will return to more vigorous, although certainly not spectacular, economic growth in coming months.

But not so fast, say others! While renewed supplies and low fuel prices will help economic growth, these more pessimistic economists say the bigger picture is being missed. This bigger picture is the housing market and what it continues to do to household wealth, spending and confidence.

Normally the housing market helps the economy out of a recession. During a recession people naturally cut back on purchasing big ticket items like appliances, furniture, vehicles and homes. After all, if your job is lost or threatened, it’s not a good time to take on new credit or mortgage payments.

Then, when the recession ends, we see a burst of big ticket buying as people make up for lost time. We’re seeing this now with relatively strong vehicle sales. This new buying helps the economy at both the retail and production levels.

But so far the housing market is still slumping, as evidenced by the continuing decline in home prices in most markets. The entire supply chain in residential housing, from the builder to the landscaper to the furniture and appliance manufacturers, is feeling the pinch and not expanding.

There’s more. Due to the drop in home prices, homeowners nationwide have lost $7 trillion in home equity (wealth) since 2006. Because spending is tied to wealth, it’s estimated this has caused consumers to cut their spending by $500 billion annually.

So, yes, the economic engine could move a little faster in coming months on the backs of slightly lower gas prices and better international trade. But many think we’ll remain stuck in the slow lane until home prices, construction and sales first stabilize and then begin to show strong gains. When will this happen? Well, economists are still trying to decide. You decide too!

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks. Previous columns are available at http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide

Related audio files are at http://www.cals.ncsu.edu/agcomm/news-center/category/economic-perspective

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