Sat, May 05, 2012 - Page 9 News List

Obama faces uphill election struggle as economy limps along

By Martin Feldstein

The US’ presidential election is now just six months away. If history is a reliable guide, the outcome will depend significantly on the economy’s performance between now and Nov. 6, and on US voters’ perception of their economic future under the two candidates.

At the moment, the US economy is limping along with slow growth and high unemployment. Output grew by just 1.5 percent last year, and real GDP per capita is lower now than before the economic downturn began at the end of 2007. Although annual GDP growth was 3 percent in the fourth quarter of last year, more than half of that reflected inventory accumulation. Final sales to households, businesses, and foreign buyers rose at only a 1.1 percent annual rate, even slower than earlier in the year. And the preliminary estimate for annual GDP growth in the first quarter of this year was a disappointing 2.2 percent, with only a 1.6 percent rise in final sales.

The labor market has been similarly disappointing. The March unemployment rate of 8.2 percent was nearly three percentage points above what most economists would consider a desirable and sustainable long-run level rate. Although the rate was down from 9 percent a year ago, about half of the change reflected a rise in the number of people who have stopped looking for work, rather than an increase in job creation and the employment rate.

Indeed, the official unemployment rate understates the weakness of the labor market. An estimated 6 percent of all employees are working fewer hours per week than they would like, and about 2 percent of potential employees are not counted as unemployed because they have not looked for work in the past few weeks, even though they would like to work. Adding these individuals to those officially classified as unemployed implies that about 15 percent of potential labor-force participants are working less than they want.

Solid increases in payroll employment at the start of the year contributed to a general sense of confidence. However, the rate of increase in payroll employment fell in March to less than half of the rate recorded in previous months, and the number of workers claiming unemployment benefits recently jumped to a four-month high.

Even those who are working are seeing their incomes shrink. Real average weekly earnings have fallen in recent months, and are now lower than they were 18 months ago. The broader measure of real per capita after-tax personal income has also been falling, and is back to levels last seen a year ago.

Despite their declining incomes, households raised their spending early this year at a rapid pace by cutting their saving rate to just 3.7 percent. Without further declines in the saving rate from this very low level, consumer spending will not continue to grow as robustly. Recent reports of declining consumer confidence reinforce the likelihood that spending will slow in the months ahead.

Moreover, the housing market remains in bad shape. The most reliable index of comparable house prices has continued to decline month after month, and prices are now about 7 percent lower in real terms than a year ago, implying a US$1 trillion loss of household wealth. With roughly 25 percent of all homeowners with mortgages owing more than their homes are worth, the decline in house prices reflects high rates of default and foreclosure. Falling prices, together with stricter lending standards, has spurred a shift by would-be home buyers to the rental market, causing recent declines in the sales of both new and existing homes.

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