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Prospects for “New Normal” of US Economy

Sep 04 , 2015

The United States economy began to pick up at an expansionary pace in the second quarter of 2009, but the recovery showed features distinctively different from previous economic rebounds. From a medium- and long-term perspective, the recovery, which has evolved in a non-traditional model, could easily develop into a “new normal” for the US economy.

First, the real economy, with manufacturing at the core, started to expand, but the overall economy was characterized by only moderate growth.

The 2008 global financial crisis has exposed the real problem with the US economy. To retool the economic structure, the US government gave top priority to development of the real economy. One important measure was the strategy of “Accelerating US Advanced Manufacturing.” The US government hoped to achieve the effect of “killing two or more birds with one stone” through the strategy: in the short term, to stimulate the economic recovery and relieve pressure of worsening unemployment; in the medium term, to achieve economic structural adjustments, foster new growth engines and promote the economic rebalancing; and in the long term, to seek a dominant role and resharpen its competitive edge in the world by cashing in on a new round of industrial revolution. To date, the US manufacturing industry has gained strong momentum for expansion and rejuvenation. One indicator is that the output value of the manufacturing industry has increased remarkably. From 2010 to 2014, the growth rate of manufacturing output value averaged 4 percent, higher than GDP growth in the same period. In May 2015, capacity utilization rose to 78.1 percent, the highest level since February 2008. Another indicator is that manufacturing has become increasingly competitive, compared with other industries. From 2010 to 2013, the growth rate of per-capita output value of the manufacturing industry was 3.9 percent, much higher than per-capita growth level for all industry (1.9 percent). The third indicator is that US companies abroad have started to return home. According to a survey of 108 US manufacturing companies with global operations, conducted by Massachusetts Institute of Technology, about 14 percent have started to move their factories and plants back to the US, and one-third are considering this option.

The overall growth of the US economy, however, was relatively moderate. The recovering pace of the US economy since 2009 has hovered at a level lower than the 3 percent to 4 percent growth before the global financial crisis, and also much slower than the recovering speed registered in the 1950-60 and 1995-2001 periods. In the first quarter of 2014, the US economy witnessed negative growth of 2.1 percent due to extreme weather conditions, and in the first quarter of 2015, growth slowed again due to the impact of harsh winter weather and the appreciation of the dollar. The volatile fluctuation of the economy, to some extent, is a reflection of vulnerability of the US economy, and the driving effect from the real economy recovery, with manufacturing industry at the core, is weakening.

Second, the loose monetary policy did not unleash a surge in inflation.


To cope with the financial crisis, the US Federal Reserve launched three rounds of massive quantitative easing, leading the national balance sheet to swell to US$4.5 trillion, but the consumer price level had stayed below the warning line of 2 percent. What really concerned people about the economy was the risk of deflation, not inflation. Secret documents accidentally leaked by the Fed on June 26 showed that Fed researchers believed the US economy will continue to be under deflationary pressure, and the inflation level will stay below the 2 percent target through the end of 2020. On July 15, the Summary of Commentary on Current Economic Conditions by the Federal Reserve, commonly known as the Beige Book, also said signs of inflation are still relatively weak, and there is only minor pressure for wage hikes. Against the backdrop of the economy bottoming out, ample liquidity and an easing monetary policy, inflation still remained at a moderate level, and this is an economic phenomenon rarely seen in the US history.

Third, unemployment rate was on the decline, but labor participation rate was also low.

Economic growth often means more new job opportunities and a rise in labor participation rate. The US unemployment rate had dropped from a high of 10 percent in October 2009 to 5.5 percent in May 2015, a low level seen in six and a half years. The Peterson Institute for International Economics previously predicted that such a low unemployment rate could not be achieved before the end of 2015 or early 2016.

With a continuing decline in unemployment, problems with structural imbalance in the labor market were also exposed. The first problem is chronic unemployment. Because they could not find full-time employment, about 6.6 million Americans are now working in part-time jobs. The number of chronically unemployed, those without a job for more than six months, is as high as 2.709 million. The labor participation rate, a gauge to measure the proportion of the employed and job-seekers in the total labor force, was a mere 62.8 percent in February 2015, the lowest level in 37 years. This shows that a big number of laborers has been unwilling to apply for new jobs and those workers have voluntarily exited the labor market. The second problem is that the living conditions of laborers did not show much improvement in the wake of rising job opportunities. According to a poll by the Pew Research Center, due to factors such as price hikes, about 25 million of the middle class have fallen into the group who live from paycheck to paycheck (spending all their monthly wages and not having a penny left to save). The third problem is that a rising number of jobs with low pay could probably become a “new normal”. According to a report from the National Employment Law Project, a national advocacy organization for employment rights of lower-wage workers, the major reason for the asynchronization in the improvement of laborers’ living conditions with the rise in employment is that most new employment opportunities are lower-paid jobs. During the economic recession, the proportion of lower-paid jobs lost accounted for 22 percent, but of the new jobs created during the economic recovery, the lower-paid ones accounted for 44 percent. Meanwhile, high-paid jobs lost during the recession accounted for 41 percent of the total, but the number of new high-paid jobs created during the recovery accounted for merely 30 percent of the total new employment opportunities.

Fourth, total social wealth increased, but the gap between the rich and the poor was further widened.

According to data released by the Federal Reserve on March 12, total assets of American families and nonprofit organizations had amounted to US$149.6 trillion in 2014, and their net assets were valued at US$8.29 trillion, a record high in the US history. Data released by the US Census Bureau in September 2014, however, showed that the median income of American families in 2013 was US$51,900, an approximately 4 percent drop from the figure of US$54,000 in 2009. According to poll findings by the Pew Research Center, the wealth median of American high-income families in 2013 was US$639,000, about 6.6 times the figure of middle-income families (US$96,500), and about 70 times the figure for low-income families (US$9,300). The wealth gap was the biggest ever since the US Census Bureau began to track wealth-gap figures in 1967, and the United States therefore has become the most unequal country among all developed nations.

From the long-term perspective, the seemingly contradictory phenomena with the US economy are expected to persist. “Moderate growth, low inflation, low labor participation rate and a growing wealth gap” will, for a considerable period of time, become the “new normal” of the US economy.

First, the US has yet to achieve revolutionary technological breakthroughs that could be commonly recognized worldwide, and the US is still in the stage of technology incubation and innovation. History has proved that the fundamental driving force for any big leap in productivity is progress in technologies, and the most powerful engine to break the constraints of the “new normal” is breakthroughs in major technological fields. However, technological progress could also be a double-edged sword. On the one hand, it could strengthen the potential for long-term economic growth; on the other hand, it could lead to worsening unemployment in the short term, and dampen laborers’ enthusiasm for jobs. In the foreseeable future, the problem of low labor participation likely will continue to haunt the US labor market.

Second, several factors can be expected to weaken the momentum for higher inflation, and the US inflation level will continue to remain low. These factors include massive exploration of shale gas, lower wages for workers due to the big number of unemployed and non-registered unemployed, and lower production costs due to applications of technological achievements and digitized production. The US government has not completely lifted restrictions on energy export, which has led to a growing accumulation of gas and oil supply in the United States because of rising production in the US. According to a monthly oil supply report issued by the Energy Information Administration on June 30, the daily export volume by the US in April was only 586,000 barrels, but its daily output was as high as 9.701 million barrels. This meant that only 6 percent of the US energy output was exported. An accumulating oil-and-gas reserve has further driven down energy prices. With a historic deal on the Iranian nuclear issue, sanctions on Iran for oil exports would gradually be removed; with Iran expected to export more crude oil, there will be little reason for a big surge in global oil prices.

Third, institutional flaws with US systems, particularly with income distribution, are the fundamental causes for a widening wealth gap in American society. Institutional reforms, however, are always the hardest nuts to crack and call for tremendous efforts and longer time to complete. Major reforms are needed in income distribution, welfare, immigration policy and medical systems if the US wants to narrow and ultimately reverse the widening wealth gap and open up a channel for ordinary Americans to climb the social ladder. However, against the current political background of fierce competition between the Republicans and Democrats and the ongoing struggle between the White House and the Capitol Hill, the chance is extremely slim for Obama, the president with less than two years in office, to successfully carry out any substantial social reforms, and furthermore, any reforms will be subject to tremendous pressure.

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