Economic Notes: 2010 – A Tale of Two Economies
12/29/2010
By Patrick O'Keefe, Director of Economic Research, J.H. Cohn
It wasn’t the best of years; it wasn’t the worst of years. It was better than some in some ways and worse than others in other. It started with a whimper and should end with a whisper.
The recovery from the 2008-09 recession has ended—happy new year! It’s not official (i.e., the data have not been published), but at sometime in the past quarter, real Gross Domestic Product (GDP) finally surpassed its pre-recession peak and shifted from rebounding to expanding.
But it has been a schizophrenic recovery (at least through November, the last month for which we have data). Some sectors have expanded robustly (e.g., private service providers and export-oriented producers) while others (e.g., construction, local governments) continued to shrink as the year-end approached.
Total employment increased during the year, with gains in private sector jobs more than offsetting cutbacks by fiscally challenged local governments. But unlike GDP's rise, total employment remains substantially below (-6.4%) its pre-recession peak.
While 2010’s gains were welcome, they were disappointing. One-third of the private sector additions were hires in the temporary help sector, which only accounts for 2% of total private employment. And underemployment (i.e., involuntary part-time workers) remains at near-record levels.
With more workers working, wage and salary disbursements rose (+3.2%) through 2010, but have yet to return to the prior peak.
Even when adjusted for inflation (which has been nugatory), there was a steady rise in personal incomes—which, in addition to worker compensation, include interest and dividends, proprietors’ incomes, rents, and transfers. Even after drops in January (the whimper) and September, real after-tax incomes were up (+2.0%).
Higher incomes translated into increased consumer spending, except in January (the wimp-month) and April (the tax-month). As a consequence, retail sales, which comprise almost half of all consumer spending, had almost fully returned to the pre-recession peak. (See “A Good Ending.”)
Although households increased spending in 2010, they were more restrained than during the previous decade. They saved more and curtailed their reliance on credit, particularly the plastic-in-their-pockets variety. Consumer credit is well below (-7.1%) where it stood when the decade-long borrowing binge ended.
From the beginning of 2000 through mid-2008, household debt more than doubled; mortgages rose almost 135%. Since then, in addition to slimming their credit balances, households have also reduced their mortgages (down 4.6% since the binge ended). Despite that, homeowner equity, as a proportion of housing values, is at a record low.
At the end of the first quarter of 2009, the combination of the financial panic and housing meltdown had slashed household net worth by $16.8 trillion, more than one-quarter (-25.6%) from its pre-crisis peak in mid-2007.
Since the nadir, household net worth has risen by almost one-fifth (+19.6%), bringing it equivalent to where it stood in 1986 relative to disposable incomes.
Gains in financial assets (+14.6% from the nadir) accounted for the lion’s share (97.3%) of the
$6 trillion improvement; while gains in housing equity added another 7.6%, which was partially offset by declines in other tangible assets (notably the real estate holdings of nonprofit entities).
As has been argued here, the legacy of the borrowing binge and subsequent meltdown in home prices will slow the economic expansion in the coming year—and beyond. Despite those drags, however, the economy is poised to gain momentum.
As with the recovery from the recession of 2008-09, the expansion will be relatively subdued. From here, the outlook for 2011 is for the rate of growth to accelerate into the summer and then level off (i.e., continue to grow at a steady pace) into 2012.
On balance, there is reason to commend the economy’s performance in 2010—but we should do so in a whisper.
Best wishes for 2011...
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The statements, opinions, and conclusions contained herein are based solely upon the author’s own studies, research, and personal experience. Neither J.H. Cohn LLP nor the author makes any representation or warranty as to the accuracy or completeness of this information. J.H. Cohn LLP and the author expressly disclaim any liability for any loss or damage which may be incurred, of any kind whatsoever, as a result of or arising from the use of any of the information contained herein or reliance on the accuracy or completeness of it.
Patrick J. O’Keefe is director of economic research at J.H. Cohn LLP. He can be reached at pokeefe@jhcohn.com or 877-704-3500.