The Tale of Two Economies, Retold

An economic recovery is in progress.  Gross domestic product — the output of goods and services produced by labor and property located in the United States —  has increased steadily beginning in the 3rd quarter of 2009.  The economy has stopped shedding jobs by the hundreds of thousands, and the private sector actually added 100,000 jobs in June and July.

But, if you’re not feeling great about the economy, you’re not alone. As New York Times Economix blogger Catherine Rampell says, “… many Americans believe they’re still in a recession because they are indeed still facing recessionlike conditions; the turmoil isn’t just in their heads.”

The tale of two economies has been told on and off for the past 2 ½ years, since Rich Karlgaard wrote “Tale of Two Economies” for the May 5, 2008, Forbes Magazine. Karlgaard discusses how the housing market hitting bottom (one part of the economy) could mean an upswing for the stock market (another part of the economy):

“If [large caps] rally only modestly, the Dow could nip 15,000 this year. Hard to believe, isn’t it?

“Worst economy or decent economy? Buy stocks or duck for cover? The great unknown is housing prices, of course. American homes have fallen, on average, 12% since 2005. How far will they go? If houses drop another 15% to 20%, the ripple will wash over more than just builders and financials. The whole consumer economy could go south. The damage would be comparable to the 1973–75 recession, when unemployment hit 9% and stocks fell 40%.”

Housing prices, as measured by the S&P/Case-Shiller Home Price Index,  fell another 18% in the year following the publishing of Karlgaard’s article, and the stock market fell 48%, to 6538.85 on March 9, 2009. Unemployment hit a high of 10.1% in October 2009.

The stock market has recovered some.  The Dow Jones Industrial Average closed at 10653.56 last Friday – back to the levels of Spring 1999. Unemployment has edged down to 9.5%.  Still too high.  And not everyone is participating in the recovery.

The “two economies” out there can be illustrated in a number of ways:

  • The He-cession continues. In December 2007, the unemployment rate for men versus women was about equal (4.5% vs. 4.4%). In July 2010, the unemployment rate for men 20 years and over was 9.7%; for women it was 7.9%.
  • For those with only a high school diploma, the unemployment rate in July 2010 was 10.1%; for those with a bachelor’s degree and higher, it was 4.5%.
  • The average unemployment rate for white Americans 16 years and over was 8.6% in July 2010; for Black or African Americans it was 15.6%.
  • Those unemployed for less than 5 weeks numbered 2.8 million in July 2010; those unemployed for 27 weeks and over numbered 6.6 million.
  • While employee compensation has increased 1.5% over the past year,  corporate profits increased 4%.
  • CEO confidence is holding steady, but consumer confidence has been falling.
  • Personal consumption expenditures have risen 3.1% over the past year, but personal savings has fallen -2.4%.
  • The bank prime interest rate is 3.25%, the investment grade bond rate (Moody’s Aaa rates) is 4.7%, but the average credit card interest rate is 14.4%.

It’s true that inflation adjusted U.S. gross domestic product and national income are up 3% compared to a year earlier, when the economy hit bottom. But output and income are still below the peak reached in the 4th quarter of 2007. Even for those of us who are okay – we can easily make our mortgage payments, put food on the table and afford some of life’s extras – there is still a profound sense of loss as the economy climbs out of its hole.

Maybe we’re not feeling as lost as when our 401(k)s and other IRAs were down 20-40% in value (depending upon the proportion in stocks), but still, the majority of us lost equity. Most of us were planning on our retirement accounts increasing in value over time, not falling, especially not back to 1999 levels.

My grandmother lived to 101.  For me and many others, the “recovery” won’t seem real until we believe we can retire before age 80 and still be okay if we suffer the misfortune of living a long and healthy life.

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About Anne Ramstetter Wenzel

Economist & Market Researcher, Certified Business Advisor for the Silicon Valley Small Business Development Center.
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