U.S. Gross Domestic Product has expanded at an average of 2.4 percent per quarter since the recession ended in 2009. This is the weakest post-recession growth rate since at least the 1940s. After the early 1980s double-dip, supply-side recessions, the rate was 5.7 percent; it was 2.7 percent after the 2002 recession. So we can conclude that the U.S. economy must grow more rapidly to create more jobs.
But the Great Recession was a demand-side recession caused by a decrease in consumer spending, not a supply-side recession caused by energy cost increases. Consumers aren’t buying. Homeowners and families, the biggest consumers, are deleveraging from the housing boom, when they leveraged their biggest asset and pulled money out to buy, buy, buy. The Great Recession pushed many homeowners under water on their mortgages and caused defaults, foreclosures and bankruptcies. This huge borrowing bulge will have to greatly deflate (deleverage) before they will start consuming again. Equilibrium in the housing market will first have to be achieved before balance sheets can improve to comfortable levels.
Eight million jobs were lost because of the crash of the construction sector, secondary effects and the continuing loss of manufacturing jobs to overseas facilities. This caused even more damage to consumer spending and ensures that jobs will have to be created before consumers will consume. This happened in spite of military-industrial-complex spending and a greatly enlarged government sector.
But economic conditions are improving.
Capital investment by business is increasing. The S&P 500 Index is currently the cheapest it has ever been compared with bond yields. The S&P earnings yield is 7.1 percent compared with a 10-year Treasury rate of 3 percent. Thus investors, both business and individual, are putting their money into equities where the return is greater. S&P 500 companies increased capital expenditures 35 percent from June 2010 through the end of 2011; factories in the U.S. boosted production 0.7 percent in January.
Low Treasury yields have an added effect. Businesses make capital investment decisions comparing the return on their investment against the risk-free Treasury yield. The lower the Treasury yield, the more capital investments will be deemed profitable. In addition, with the cost of borrowing money so low, businesses are more likely to replace aging equipment and upgrade manufacturing processes, thus reducing production costs. With corporations awash in cash, many of these investments are being made. Savers are not being rewarded.
This process is not happening quickly, but it is picking up speed. Jobs are being created and consumer confidence is improving. But joblessness is still more than two percentage points above its average since 1990 and existing home sales, at 4.6 million in December, is 23 percent below its 1999-2006 average. Also, the share of working-age people in the labor force has declined to its lowest level in 29 years. Large numbers of potential workers (consumers) are still discouraged enough to not even hunt for a job.
Business, via capital investment, is going to have to lead the way out of this recession. Government can and has helped, halting the slide into another Great Depression. More government investment in infrastructure can still provide a further boost to the economy, probably lowering increased business costs from deteriorating infrastructure by 5-6 percent.
According to the most recent The Rocky Mountain Economist, Colorado metro area employment was mixed in 2011. The Fort Collins-Loveland and Boulder metro areas experienced the strongest job growth in the state. The Denver and Pueblo metro areas lagged only slightly. Greeley employment was flat, while Grand Junction and Colorado Springs lost jobs. Grand Junction was one of the weakest metro areas in the U.S.
In Fort Collins-Loveland, strong population growth and demand for high-skilled workers have supported employment growth and housing construction and sales. Growth in this metro area was 1.3 percent in November vs. November 2010, pushing overall employment back to pre-Great Recession levels. Retail trade and health services were the strongest sectors but the manufacturing sector also added jobs, continuing a trend from 2010.
Drilling activity in Weld County supported jobs and economic activity in Greeley. Employment in the Greeley metro area (Weld County) increased more than 0.1 percent in November vs. a year ago. Rig counts in Weld County more than tripled since the end of the recession and now represent over half of rig counts in Colorado. The U.S. is in the beginning stages of greatly increased crude oil production and a conversion to natural gas as an electricity and energy transportation fuel source.
There are many things we can do to speed up the rate of recovery from the Great Recession. We must avoid creating more job losses by cutting spending levels. We must increase funding of education to retrain workers without the skills to compete in the new economy. We must speed up the switch to natural gas as an electricity generator and as a transportation fuel. We must use more alternative energy. We must encourage manufacturers to bring overseas jobs back to the U.S. And, above all, we must protect the environment in Northern Colorado that puts us perennially in the top 10 places to be productive, recreate and retire.
John W. Green is a regional economist who compiles the Northern Colorado Business Report’s Index of Leading Economic Indicators. He can be reached at firstname.lastname@example.org.