The casualties of the recession are endless: General Motors, Chrysler, American International Group, Lehman Brothers, Bear Stearns, CIT Group, and the list goes on. Whether through bankruptcy or bailouts, each of these former American icons has failed during what many have called the worst economic downturn since the Great Depression.
There is no question the recession has been a painful one, but on Sept. 20, the National Bureau of Economic Research declared that the recession ended in June 2009. Much of the suffering has ended, and the country has begun its recovery toward better days.
In the news, recent headlines have been positive. Real gross domestic product in the United States was reported to have grown at an annual rate of two percent during the third quarter of 2010, up from 1.7 percent during the previous quarter. In October, nonfarm payroll employment increased by 151,000, netting a total increase of 874,000 since December 2009. In the same month, retail sales rose for the 14th straight month. In September, sales of new and existing homes in the United States rose by 6.6 percent and 10 percent, respectively.
All these are good signs for the economy. Or are they?
The GDP number is the result of significant steps by both Congress and the Federal Reserve to stimulate the economy through fiscal and monetary policy. Congress alone injected $787 billion worth of government money to prop up the economy. But despite the aid, the economy barely eked out 2 percent growth. The details reveal an even bleaker picture. Personal consumption expenditures rose by 2.6 percent, which is normally a positive sign, seeing as consumption comprises a large majority of GDP. Nevertheless, this figure ran parallel with personal incomes falling 0.1 percent. This trend is not sustainable - spending cannot increase without income increasing alongside it. Plus, to complete the picture, the country will begin to see the expiration of unemployment benefits for the jobless.
By no stretch can the current economy be considered booming. It feels as if unemployment has been near 10 percent forever. With 15 million Americans out of jobs, it would be ludicrous to be satisfied with the current state of the U.S. economy. But thanks to stimulus programs, even the unemployed have a source of income in the form of unemployment benefits. Because Congress has extended these benefits during the recession, jobless workers can now collect their benefits for up to 99 weeks and have been aptly dubbed "the 99ers." Unfortunately, the two-year benefit period is about to end for some of these workers. It is estimated that by April, nearly 4 million, or more than 26 percent, of the unemployed will have run out of their benefits. The predicament that these people will find themselves in is whether they find jobs or find themselves with no income.
There are problems even for those who are employed. The latest job figures noted that 124,000 full-time jobs were shed in October, raising the total to more than 1 million full-time jobs lost since June. What this means is that companies are substituting full-time jobs for part-time, creating a most-fragile state of affairs in employment.
And it is not just the American consumer that finds himself weak. Since the recession's end, the housing market has not become particularly stronger. To gain an idea of how fragile parts of the U.S. economy are, one can look at the homebuyer's tax credit program. Another stimulus program from Congress, the tax credit granted a purchase subsidy of up to $8,000 with the goal of reducing the excess supply of homes and preventing further decline in home prices. For the lifespan of the program, it seemed to work well. But after the tax credit expired in April, new home sales in the U.S. dropped by almost a third in May.
And yet the S&P 500 has increased by more than 16 percent since September 2010. This can only be explained by the growing expectations for Ben Bernanke and the Federal Reserve to employ further quantitative easing, popularly known as QE2. Put another way, the stock market has no confidence in itself without government intervention. Every time the stock market drops because of fear of an interest rate increase serves as an ominous reminder that the current market has no confidence in itself being independent from government help.
The current U.S. economy is one run on life support. Fiscal stimulus by Congress and quantitative easing by the Federal Reserve have buoyed the economic numbers since the recession. But federal spending is only a temporary solution. The U.S. government cannot print infinite amounts of money without grave consequences, and short-term solutions must be substantiated by the long-term solutions of structural reform.\n\nHideyuki's column runs biweekly Wednesdays. He can be reached at h.liu@cavalierdaily.com.
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