America has turned the corner, but our economy is not as good as you think.
The U.S. economy is better off today than during the worst of the financial crisis and the resulting Great Recession. Unemployment is down from a high of 9.9 percent to 5.5 percent. Annual GDP growth is up from a low of -2.0 percent to 2.2 percent. The stock market and the U.S. dollar have reached all-time highs. And the American economy’s recovery has become the envy of most of the rest of the world.
Yet despite this good news, the underlying data trends are troubling. Here are seven signs that America is not out of the woods yet.
The labor market is a shadow of its former self. Unemployment has dropped because of job growth, but many of those jobs are low-paying service positions. High-paying manufacturing jobs are being replaced by bartending jobs. And the unemployment rate is artificially low because the denominator keeps shrinking due to the record low numbers of Americans participating in the workforce.
Economic growth continues to disappoint. Since 2010, the economy has fallen short of forecasts 12 quarters while exceeding expectations nine times and meeting them two times. GDP for the first quarter of 2015 was forecast at 1.2 percent and the actual GDP was 0.2 percent.
The world economy is in trouble. The European Union is implementing a last-ditch attempt to stimulate their economy as it teeters on deflation, with wildcard Greece potentially defaulting or departing from the EU. Japan, despite unprecedented accommodative monetary policy, has not shocked their economy out of its malaise. China’s economic growth engine is starting to run out of steam. All are following the U.S. lead by pursuing easy money policies while the U.S. is trying to stop them because of diminishing returns.
U.S. consumers are spending cautiously. Domestic demand has always been a primary driver to America’s economic growth. But stagnant wages, concerns about layoffs, maxed out credit cards, shrinking consumer confidence and less materialism have put a damper spending.
The sky-high dollar is starting to take its economic toll. Exports have fallen because U.S. goods are more expensive overseas, which hurts high-paying U.S. jobs. A strong dollar also hurts corporate earnings and will increase the risks to U.S. banks that loaned dollars to companies in emerging markets.
Corporate earnings are declining. First-quarter 2015 corporate earnings shrunk 4.6 percent compared with the first quarter of 2014. This is the biggest decline since the depths of the Great Recession. These results are even more disappointing considering the $550 billion in stock buybacks. And adding further concern are the missed sales revenue forecasts.
Record highs in the stock market are as much about quantitative easing as they are about corporate performance. When the economy puts out a good number, the markets go up. And when the economy puts out a bad number, the markets go up. That is because the markets have become reliant on the Federal Reserve’s easy money policies and believe that the Fed will continue to fill the punch bowl to keep the party going.
The primary challenge ahead is improving economic growth. Monetary stimulus can help but it has limits without robust pro-growth fiscal policies like lower taxes and tax reform, fewer regulations and regulatory reform, cutting government spending and reforming entitlement programs. Many of our economic problems disappear when the American economy grows at 4 percent or more.
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