Economic Snapshot: November 2014

Christian E. Weller on the State of the U.S. Economy

By Christian E. Weller and Jackie Odum

November 24, 2014

Both the economy and jobs remain front and center on the minds of Americans.
Considering that the United States is officially in the sixth year of an economic recovery,
this would be surprising were it not for the economic data telling us that the nation is
going through an unusually weak economic expansion. Economic productivity, which
generates the resources for future increases in living standards, has been growing more
slowly in this recovery than in any other recovery of at least equal length since World
War II. Job growth has therefore been modest and is only now, albeit slowly, picking up
steam. Many vulnerable groups struggle with high unemployment rates. Moreover,
middle-class incomes are falling, household debt remains high, and the housing marketwhich generally drives the economy to faster growth after a recessionis consequently still stuck at a relatively low level, holding back economic growth. To make
matters worse, governmentsfederal, state, and localengaged in wrongheaded
austerity measures in the middle of an already weak recovery and further slowed
economic growth. This all adds up to an economy caught in the doldrums, leaving
middle-class Americans worried about their future.
It doesnt have to be this way. There are substantial resources to build a stronger economy. Corporate profits levels are high and continue to grow, incomes at the top have
risen strongly, and government budget deficits are shrinking and, in some cases, even
turning into surpluses. A different fiscal and regulatory regime that puts people first
would lead to faster growth that benefits everyone, not just the lucky few. This means
investing in the future through infrastructure spending on roads, bridges, and schools;
making the tax code simpler, fairer, and more efficient; raising wages through a higher
minimum wage; making it easier to join a union; and offering meaningful benefits, such
as health insurance, retirement savings, and paid sick leave to all workers.
1. Economic growth in this recovery lags behind that of previous business cycles.
GDP increased in the third quarter of 2014 at an inflation-adjustedannual rate of 3.5
percent, after an increase of 4.6 percent in the previous quarter. Domestic consumption increased by an annual rate of 1.8percent, and housing spending rose by 1.8

1 Center for American Progress | Economic Snapshot: November 2014

percent, while businessinvestment growth also increased at a rate of 5.5 percent.

Exports increased 7.8 percent inthe third quarter, which was offset by even faster
import growth of 1.7 percent. Federal government spending rose by 10 percent,
while state and local government spending increased by only 1.3 percent. The
economyexpanded 12.5 percent from June 2009 to September 2014its slowest
expansion duringrecoveries of at least equal length.

FIGURE 1

GDP growth still lags behind historical average

GDP growth in the first five years of expansion
25%
24.8%

20%
Average of previous recoveries since 1960

12.5%

15%
Current recovery
10%
5%
0%
1

11

13

15

17

19

21

Quarters since end of recession

Note: The historical averge for the 21st quarter does not include the 1975 expansion as it only lasted 20 quarters.
Source: CAP analysis of Bureau of Economic Analysis data.

2. Improvements to U.S. competitiveness fall behind previous business cycles.

Productivity growth, measured as the increase in inflation-adjusted output per hour,
is key to increasing living standards, as it means that workers are getting better at
doing more in the same amount of time. Slower productivity growth thus means that
new economic resources available to improve living standards are growing more
slowly than would be the case with faster productivity growth. U.S. productivity rose
7.2 percent from June 2009 to September 2014, the first 21 quarters of the economic
recovery since the end of the Great Recession.1 This compares to an average of 14.8
percent during all previous recoveries of at least equal length.2 No previous recovery
had lower productivity growth than the current one.

2 Center for American Progress | Economic Snapshot: November 2014

FIGURE 2

Productivity growth in recovery compared to previous recessions

Percentage of growth during first 20 quarters
15%

12%

14.8%

Average of previous recoveries

9%

7.2%
Current economic recovery

6%

3%

0%

10

11

12

13

14

15

16

17

18

19

20

Source: Calculations are based on productivity growth (output per hour) for nonfarm businesses from Bureau of Labor Statistics, Current Employment
Statistics (U.S. Department of Labor, 2014).

3. The housing market recovery still struggles to gain momentum. New-home sales
amounted to an annual rate of 467,000 in September 2014a 17 percent percent
increase from the 399,000 homes sold in September 2013 but well below the
historical average of 698,000 homes sold before the Great Recession.3 The median
new-home price in September 2014 was $259,000, up from one year earlier.4
Existing-home sales increased by 2.4 percent in September 2014 from one year
earlier, and the median price for existing homes was up by 5.6 percent during the
same period.5 Home sales have to go a lot further, given that homeownership in the
United States stood at 64.4 percent in the third quarter of 2014, down from 68.2
percent before the 2007 recession. The current homeownership rates are similar to
those recorded in 1996, well before the most recent housing bubble started.6 A
strong housing-market recovery can boost economic growth, and there is still plenty
of room for the housing market to provide more stimulation to the economy more
broadly than it did before the recent slowdown.
4. Moderate labor-market recovery shows less job growth than in previous business cycles. There were 8.7 million more jobs in October 2014 than in June 2009.
The private sector added 9.4 million jobs during this period. The loss of some
559,000 state and local government jobs explains the difference between the net
gain of all jobs and the private-sector gain in this period. Budget cuts reduced the
number of teachers, bus drivers, firefighters, and police officers, among others.7 The
total number of jobs has now grown by 6.7 percent during this recovery, compared
to an average of 13.2 percent during all prior recoveries of at least equal length.8

3 Center for American Progress | Economic Snapshot: November 2014

FIGURE 3

Employment growth falls behind historical average

13.2%

15%

10%

6.7%
Historical average

5%
Current recovery
0%

-5%

10

20

30

40

50

60

Month
Source: Authors' calculations based on data from the Bureau of Labor Statistics.

5. Employment opportunities grow very slowly for people in their prime earning
years. The employed share of the population from ages 25 to 54which is unaffected by the aging of the overall populationwas 76.9 percent in October 2014.
This was just above the level recorded in June 2009 and well below the levels
recorded since the mid-1980s and before the Great Recession started in 2007. The
employed share of the population has, on average, grown by 3.4 percentage points at
this stage during previous recoveries of at least equal length.9
6. Employers cut back on health and pension benefits. The share of people with
employer-sponsored health insurance dropped from 59.8 percent in 2007 to 53.9
percent in 2013, the most recent year for which data are available.10 The share of
private-sector workers who participated in a retirement plan at work fell to 40.8
percent in 2013, down from 41.5 percent in 2007.11 Families now have less economic
security than in the past due to fewer employment-based benefits, which requires
them to have more private savings to make up the difference.
7. Some communities continue to struggle disproportionately from unemployment.
The unemployment rate fell to 5.8 percent in October 2014. The African American
unemployment rate fell slightly to 10.9 percent, the Hispanic unemployment rate
ticked down to 6.8 percent, and the white unemployment rate fell to 4.8 percent.
Meanwhile, youth unemployment decreased to 18.6 percent. The unemployment
rate for people without a high school diploma was 7.9 percent, compared with 5.7
percent for those with a high school degree, 4.8 percent for those with some college
education, and 3.1 percent for those with a college degree.12 Population groups with
higher unemployment rates have struggled disproportionately more amid the weak
labor market than white workers, older workers, and workers with more education.

4 Center for American Progress | Economic Snapshot: November 2014

8. The rich continue to pull away from most Americans. Incomes of households at
the 95th percentilethose with incomes of $196,000 in 2013, the most recent
year for which data are availablewere more than nine times the incomes of
households in the 20th percentile, whose incomes were $20,900. This is the largest
gap between the top 5 percent and the bottom 20 percent of households since the
U.S. Census Bureau started keeping records in 1967. Median inflation-adjusted
household income stood at $51,939 in 2013, its lowest level in inflation-adjusted
dollars since 1995.13
9. Corporate profits stay elevated near pre-crisis peaks. Inflation-adjusted corporate
profits were 94 percent larger in June 2014 than in June 2009. The after-tax corporate
profit rateprofits to total assetsstood at 3.2 percent in June 2014.14 Corporate
profits recovered quickly toward the end of the Great Recession and have stayed
high since then. Addressing income inequality that arises from the rich receiving
outsized benefits from their wealth through tax reform is a crucial policy priority.

FIGURE 4

Corporate profits stay elevated near pre-recession peaks

After-tax corporate profit rate
3.5%

3.18%

3.0%
2.51%

2.5%
2.0%
1.5%
1.0%

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05
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0.5%

Note: Shaded bars indicate recessions as defined by the National Bureau of Economic Research.
Source: Profit rates are calculated based on data from Board of Governors of the Federal Reserve System, Z.1 Release--Financial Accounts of the
United States (2014). Inflation adjustments are based on the Personal Consumption Expenditure Index from Bureau of Economic Analysis, National
Income and Product Accounts.

5 Center for American Progress | Economic Snapshot: November 2014

10. Corporations spend much of their money to keep shareholders happy. From
December 2007when the Great Recession startedto June 2014, nonfinancial
corporations spent, on average, 99.6 percent of their after-tax profits on dividend
payouts and share repurchases.15 In short, almost all of nonfinancial corporate
after-tax profits have gone to keeping shareholders happy during the current business
cycle. Nonfinancial corporations also held, on average, 5.3 percent of all of their
assets in cashthe highest average share since the business cycle that ended in
December 1969. Nonfinancial corporations spent, on average, 163.4 percent of their
after-tax profits on capital expenditures or investmentsby selling other assets and
by borrowing. This was the lowest ratio since the business cycle that ended in 1960.
U.S. corporations have prioritized keeping shareholders happy and building up cash
over investments in structures and equipment, highlighting the need for regulatory
reform that incentivizes corporations to invest in research and development,
manufacturing plants and equipment, and workforce development.

FIGURE 5

Dividend and share repurchases as a share of after tax profit

Average share of after-tax profit

163.4%

150%

100%

50%
29.4%

33.9%

Sept.
1953

Dec.
1957

106.2%

96.5%

92.1%

Sept.
1980

Dec.
1990

38.2%

Sept.
1960

20.2%

23.7%

March
1970

Dec.
1973

June
2001

March
2008

Source: Average of dividend and share repurchases as a share of after tax profit are calculated based on data from Board of Governors of the
Federal Reserve System, Z.1 Release--Financial Accounts of the United States (2014). Inflation adjustments are based on the Personal Consumption
Expenditure Index from Bureau of Economic Analysis, National Income and Product Accounts.

11. Poverty is still widespread. The poverty rate was 14.5 percent in 2013, down from
15 percent in 2012. This change, however, was statistically insignificant. Moreover,
the poverty rate for this recovery increased at a rate of 0.2 percentage points,
compared to an average decrease of 0.7 percentage points in previous recoveries of at
least equal length. Some population groups suffer from much higher poverty rate
than others. The African American poverty rate, for instance, was 27.2 percent, and
the Hispanic poverty rate was 23.5 percent, while the white poverty rate was 9.6
percent. The poverty rate for children under age 18 fell to 19.9 percent. More than
one-third of African American children37.7 percentlived in poverty in 2013,
compared with 30.4 percent of Hispanic children and 10.7 percent of white children.16

6 Center for American Progress | Economic Snapshot: November 2014

12. Household debt is still high. Household debt equaled 102.4 percent of after-tax
income in June 2014, down from a peak of 129.7 percent in December 2007.17 A
return to debt growth outpacing income growth, which was the case prior to the
start of the Great Recession in 2007, from already-high debt levels could eventually
slow economic growth again. This would be especially true if interest rates also rise
from historically low levels due to a change in the Federal Reserves policies.
Consumers would have to pay more for their debt, and they would have less money
available for consumption and saving.
Christian E. Weller is a Senior Fellow at the Center for American Progress and a professor in
the Department of Public Policy and Public Affairs at the McCormack Graduate School of
Policy and Global Studies at the University of Massachusetts, Boston. Jackie Odum is a
Research Assistant for the Economic Policy team at the Center.

7 Center for American Progress | Economic Snapshot: November 2014

Endnotes
1 Calculations are based on productivity growth (output per
hour) for nonfarm businesses from Bureau of Labor
Statistics, Current Employment Statistics (U.S. Department of
Labor, 2014).
2 Ibid.
3 The historical average refers to the average annualized
monthly residential sales from January 1963, when the
Census data started, to December 2007, when the Great
Recession started. Calculations are based on Bureau of the
Census, New Residential Sales Historical Data (U.S.
Department of Commerce, 2014).
4 Ibid.
5 National Association of Realtors, Existing-Home Sales
Rebound in September, Press release, October 21, 2014,
available at http://www.realtor.org/news-releases/2014/10/
existing-home-sales-rebound-in-september.
6 Bureau of the Census, Housing Vacancies and Homeownership (U.S. Department of Commerce, 2014).
7 Employment-growth data are calculated based on Bureau
of Labor Statistics, Current Employment Statistics.
8 Ibid.
9 Calculations based on Bureau of Labor Statistics, Current
Population Survey (U.S. Department of Labor, 2014).

11 Craig Copeland, Employment-Based Retirement Plan Participation: Geographic Differences and Trends, 2013
(Washington: Employee Benefit Research Institute, 2014),
available at http://papers.ssrn.com/sol3/papers.
cfm?abstract_id=2515930.
12 Unemployment numbers are taken from Bureau of Labor
Statistics, Current Population Survey.
13 Bureau of the Census, Income, Poverty, and Health Insurance
Coverage in the United States: 2013.
14 Profit rates are calculated based on data from Board of
Governors of the Federal Reserve System, Z.1 Release--Financial Accounts of the United States (2014). Inflation
adjustments are based on the Personal Consumption
Expenditure Index from Bureau of Economic Analysis,
National Income and Product Accounts.
15 Calculations are based on Board of Governors of the Federal
Reserve System, Z.1 Release--Financial Accounts of the
United States.
16 Calculations are based on Bureau of the Census, Income,
Poverty, and Health Insurance Coverage in the United States:
2013.
17 Calculations are based on Board of Governors of the Federal
Reserve System, Z.1 ReleaseFinancial Accounts of the
United States.

10 Bureau of the Census, Income, Poverty, and Health Insurance

Coverage in the United States: 2013.

8 Center for American Progress | Economic Snapshot: November 2014