Six Reasons to Expect Slow Economic Growth Ahead
Here are six long-term trends which are unlikely to turn on a dime. Each offers a serious headwind to future growth in the U.S. economy.
1. The U.S. money supply isn't rising enough to fuel strong growth. It's almost counter-intuitive: How, when the federal government is borrowing and spending trillions of dollars, can it be that the quantity of money in savings and checking accounts, money market funds and other liquid assets is barely growing?
Hoisington Investment Management Company recently issued a report that showed how M2, the broadest measure of money in bank accounts, money market funds, etc., has grown by a meager 1.7% in the past year, the slowest growth in fifteen years.
That reflects how little of the bailout and stimulus funds have actually ended up in the real economy. The correlation between slow growth in M2 and in the GDP is strong.
2. The job market is dominated by temp and freelance/contract work. While temp jobs are rising at a strong 19%, year over year, private payrolls minus temp jobs are down 0.7%, meaning that permanent jobs in the private sector are still declining.
I addressed the long-term forces which are transforming America into "freelance nation" in a DailyFinance column back in January.
3. Financial insecurity is rising. American households are caught in a vice: Even as wages stagnate and long-term unemployment erodes household incomes, the assets such as home equity which provided a cushion have also fallen. Medical and education costs are also rising, further squeezing households.
As a result, the risk of "experiencing a major economic loss" is climbing. Those households which can save money have powerful reasons to sock away a cash cushion to weather possible emergencies such as job loss or major out-of-pocket medical expenses, and few incentives to spend all their disposable income.
The Pew Research Center recently issued a report, How the Great Recession Has Changed Life in America, which documents the new frugality and the punishing effects of the recession on household expectations, security and wealth.
According to the report, median household wealth decreased by a whopping 19% from 2007 to 2009. Coupled with the poor job market, this has changed Americans' perceptions and planning. When asked to predict their financial behaviors once the economy recovers, 48% say they plan to save more, 31% say they plan to spend less and 30% say they plan to borrow less.
All of those trends suggest there will be significantly less consumer spending in the years ahead-a sobering prospect in an economy which relies on household spending for 70% of its GDP.
4. Home values are still declining in much of the country. Houses are the bedrock of middle-class wealth, but that bedrock is still shaky. Sales have fallen, and outside of a few pockets where the numbers have been driven higher by investor buying and shrinking inventories, the housing market remains weak.
Foreclosures are still rising at a record pace, and the gap between what Americans lost in the housing bust and what they've recovered in value in the past year is in the trillions of dollars.
5. Households have gone from borrowing freely against their home equity to paying down debt. This process is called deleveraging, and this chart illustrates how equity extraction via mortgage refinancing has plummeted. The total amount Americans owe on their mortgages actually began declining in 2008 and continues to do so, according to the Federal Reserve's Flow of Funds report.
The net result is that American households no longer have the extra money to spend that they did during the heyday of the housing boom. And what extra money they do have, they are devoting more often to reducing debt, which translates into even less consumer spending.
6. Local taxes will rise, reducing household income and spending. While it appears that only the highest-income households will see an increase in their federal tax rates as the Bush-era tax cuts expire, local and state taxes are on the rise, as are fees such as traffic fines which act just like taxes even if they avoid the dreaded label of "tax increase."
In Philadelphia, property taxes are slated to rise a hefty 9.9%. Fairfield, N.J., passed an 11% increase in property taxes. These are not isolated incidents, but examples of a nationwide trend.
The legislature in Kansas recently raised the sales tax by 1% to 6.3%, a move which mirrors the widespread state and local rush to raise sales taxes across the board.
Despite these substantial (in percentage terms) tax hikes, total tax revenues in many areas are flat or declining. Tax revenues in Nebraska are still falling, foiling forecasts, and Galveston County in Texas saw tax revenues fall by 17%.
In addition to raising property and sales taxes, local governments are also jacking up parking rates, traffic fines and a multitude of other fees and levies. As I reported last October, some of the most outrageous examples are traffic tickets and related court costs.
Given that all these multiple increases in taxes and fees have barely reversed the decline in local and state tax revenues, local authorities will undoubtedly press even harder for additional taxes to compensate for the lower revenues caused by declines in spending and housing valuations. This trend to ever-higher taxes and fees will have long-term negative consequences on household finances and consumer spending.