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Is the U.S. economy permanently 'stuck in the mud?'

By Catholic Online (NEWS CONSORTIUM)
August 2nd, 2012
Catholic Online (www.catholic.org)

Federal Reserve policymakers seem resigned to the fact that the plodding U.S. economy may be out of reach to change. After a two-day meeting, Fed Chairman Ben Bernanke told Congress that there are too few options to speed up an economy that may be "stuck in the mud."

LOS ANGELES. CA (Catholic Online) - "The problem is the things that are holding back the economy -- the uncertainty about tax rates next year, the problems in Europe and the problems in Asia -- are absolutely nothing that U.S. monetary policy can address with the tools it's got left," John Ryding, chief economist at RDQ economics said.

Central bankers are giving thought to the option of buying more long-term bonds to keep interest rates low, but even these measures are not expected to be announced when the Fed this week.

While growth has slowed sharply from a surge late last year, the expansion continues to crawl along at a lethargic 1.5 percent annual pace.

The slow growth avoids the technical definition of recession, but the snail-like pace of hiring makes it feel like a downturn for the 12.7 million American workers without work.

Some experts fear the economy may be permanently stuck in slow-growth mode.

"We do think we've seen more permanent changes in the economy as a result of this recession," Michelle Meyer, an economist at Bank of America Merrill Lynch says. "We estimate potential growth to be at about 2.25 percent, whereas back in 2005 we were saying it was about 3.5 percent."

The numbers of Americans who have left the workforce include many older workers who are gone for good. The pace of growth will be held back as long as an aging baby boom population continues to leave the workforce and cut back on spending.

People in the U.S. who are working feel little job security. "People aren't necessarily panicked to lose their job, but they're not really confident enough to borrow a lot and spend a lot," Richard Hoey, chief economist of BNY Mellon says. "We're expansionary at a subpar pace. We're not going into a recession but sure aren't going into a boom, either."

It may be a long while before U.S. consumers begin spending again at levels usually expected in a recovery.

This far into the previous five recoveries, the economy was expanding at an average pace of 4.4 percent, twice the current average. The biggest single missing growth component is consumer spending.

In lieu of a sudden uptick in new hiring, consumers aren't likely to resume spending at historical levels, especially as households continue to work off a surge in credit card and mortgage debt that preceded the financial collapse of 2008.

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