TCS Daily

The U.S. Economy: What Does it Mean for Politicians?

By Alex M. Brill - November 9, 2007 12:00 AM

Just when the news is fully saturated with the idea that the U.S. economy is on the brink of a recession caused by the bursting of the sub-prime lending bubble, we get some surprising news last week: The U.S. economy grew at a 3.9 percent (all growth rates are annualized) from July through September, the fastest rate in six quarters. Exports surged 16.2 percent and consumer spending remained strong. 

What's more, jobs are being created and the unemployment rate remains low. While economists had expected a paltry 80,000 new jobs for October, the government reported 166,000.

Nevertheless, we continue to get doses of worrisome news: home prices are falling, oil prices are rising and consumer confidence (as measured by the Conference Board) is now at the lowest point since Hurricane Katrina.

There is a longstanding tradition of legislative intervention to address the consequences of economic change. How might the economic outlook shape the Congressional agenda?

What's Happening to the Economy?

Consumer Spending

The economic expansion of the last five years has been heavily fueled by strong consumer demand. Personal consumption currently consumes 70 percent of total U.S. output and while overall real economic growth has averaged 3.0 percent since 2002, personal consumption has averaged 3.2 percent growth. Many economists -- including former Federal Reserve Board Chairman Alan Greenspan -- have remarked that some of this surge has been driven by rapidly rising home prices and the ease by which a homeowner can get an equity line of credit or refinance a mortgage and "cash out" the increase in home value. If this is correct, then there is valid concern that falling home prices will result in less consumer spending and a weaker economy.

And, if fact, home prices are declining. The S&P/Case-Shilling Home Price Index has dropped 4.4 percent over the 12 months through August; the latest available data. Meanwhile, consumer spending has remained strong at 3 percent. Perhaps we just need to wait a while longer before we see a drop off in spending as a result of the housing market's weakness; or perhaps this link is more tenuous than some had suggested.

One place to look to try to see if this is just a matter of time before consumers collapse is to look to see if personal debt is rising. Are Americans simply borrowing on their credit cards when they can no longer borrow from their home? The best answer will come from the Federal Reserve Board's quarterly report indicating the fraction of after-tax income that households spend servicing their debt obligations. The data for the third quarter won't be available until December but the recent trend has been down, not up.


The U.S. and the world economy have tended to be in relative synch in terms of growth. When the U.S. economy slipped into recession in 2001, the world economy slowed considerably as well. Today, things appear different. While forecasts for U.S. growth are marked down, forecasts for global growth are increasing. Above trend growth in Europe combined with a dramatically cheaper dollar has led to an increase in U.S. exports. Over the last year, U.S. exports have increased nearly 10 percent while the overall economy has grown by 2.6 percent. This export surge added 1.8 points to overall U.S. growth in the last quarter. After accounting for the offsetting surge in imports, overall trade boosted growth by nearly a percentage point.


Further good news last week was that business investment in equipment and software remains strong. This sometimes volatile statistic increased 5.9 percent in the third quarter compared to just 1.4 percent over the last year. Given rising costs of borrowing money and discussions of tax increases on business investment, sturdy growth in this category is an important indicator that there is long-term confidence in the global economy.

Jobs and Income

In addition to a strong boost in output in the U.S. economy last quarter, last week we received good jobs numbers as well. The net increase in employment was 166,000 in October and the U.S. has increased employment by 1.7 million jobs in the last twelve months. While neither of these statistics is stellar, they are consistent with solid economic performance and not consistent with an economy teetering on the edge of recession.

Blip or Turning Point?

The question for economists trying to peer into the 2008 economy is if last week's data is the beginning of a new course for the U.S. economy or just noise in the data. Both the jobs data and the GDP data will be revised twice in the next two months and big changes can show it in revisions. In addition, the fastest single quarter of growth since 2003 (Q3, 2003) occurred in the slowest of the four most recent years and the second faster quarter (Q1, 2006) occurred in the second slowest year. So, even an entire quarter of data may not clearly point to the broader trend for growth.

Furthermore, the weak consumer survey data, continued slide of the housing market and oil prices heading towards $100 all suggest that the risks for the U.S. economy remain despite last week's good news.

What's A Politician to Do?

Politicians do not like to sit idle while the economy undergoes any type of negative change, whether it is a loss of manufacturing jobs, a deceleration of median wages or a full blown recession. At present, Congressional intervention aimed at the natural ebb and flow of the economy is focused on providing assistance for those caught in the downturn of the housing market, just like the large legislative action focused on the devastation after Hurricane Katrina. Much as economists worry about contagion effects from housing on to the broader economy, there is rightful concern of contagion effects in Congress, too. If the labor market deteriorates, expect additional unemployment assistance. If the trade deficit worsens, expect more assistance to import sensitive industries. If home heating prices rise too high this winter, expect relief to lower income families.

The author is research fellow at the American Enterprise Institute.


The error here is that growth is not in itself intrinsically good
Come on guys. This is a no-brainer.

The problem is real easy to understand. We are caught between a rock and a hard place in the Middle East and so subsequently are going into debt. As the US debt grows, so does the cost of imports. And given that the US imports a sizable fraction its energy, so does the cost of domestic items.

So the US economy is going down the tubes because the government is engaged in a war to appease Zionists (AKA Neocons) and global corporations; neither of which give a hill of beans for the welfare of the public-at-large.

ah yes, it's better to keep the peasants poor so they don't compete with the intellectuals
or should I say (in Stephen's case) self styled intellectuals.

Typical stephen, everything bad is the fault of the Jews.

Apparently Mark doesn't know the difference between Jews and Neocons
or something like that. They are NOT one and the same. However, the Neoconservative movement was Zionist, or at least pro-Israel expansion.

And, really, isn't that what US foreign policy has been all about since Bush took office?

Annual "Play" Money Tops the $1.7 Trillion Mark
November 8, 2007-According to a new study published by the non-profit business membership and research organization the Conference Board, nearly 73 million United States households now enjoy discretionary income, a figure that is up from approximately 57 million in 2002.

The percentage of the American population possessing discretionary income has risen to almost 64 percent, which is up from 52 percent five years ago.

Total discretionary income in the United States went over the $1.7 trillion mark last year, with the household average coming in at $24,335.

Households with annual earnings of $200,000 or more account for only three percent of total households and just five percent of households with discretionary income. However, these affluent Americans possess 38 percent of total discretionary income, with an average of $173,613, more than seven times the national average.

Households with earnings of under $50,000 per year account for almost 60 percent of all households in the United States, as well as 29 percent of those households with discretionary income. However, together they possess only three percent of discretionary income, with the household average at approximately $1,900 per year.

The report is published at a time when many middle class Americans and politicians are decrying the ever-widening income gap between the affluent and the middle and poor classes in the United States and the shrinking of the middle class.

Critics of the "knee-jerk" vilification of the Republican Party and the Bush Administration that come from many Democratic politicians and liberal economists and seek to blame their taxation policies and "lack of oversight" for the "polarization" point out that it is a trend that began in earnest during the early 1990s when the Clinton Administration was in the White House.

These critics also heap harsh words upon politicians for trying to turn the widening gap into a problem that requires them to raise taxes and take yet more control of the economy and society, when the reality is that a growing wealth gap is not in and of itself a sign of any "conspiracy" but rather a natural symptom of the free market wherein some people are more ambitious, more interested in accumulating wealth, better trained, or just more talented than others.

What causes true national poverty, they assert, is not income inequalities but intrusive government programs that only serve to discourage job creation, wealth accumulation, economic class mobility, and incentives to produce while making it easier for the unscrupulous and unproductive to obtain money or "free" services through political manipulations.

One of the biggest reasons for the shrinking middle class, many economists point out, is the fact that more households are rising out of and above it to "affluence" status.

In their 1996-published book The Millionaire Next Door, Thomas J. Stanley, Ph.D, and William D. Danko, Ph.D, wrote that the great majority of wealthy Americans (those with total asset values of $1 millon or more) have never earned more than $50,000 a year in a paycheck.

The authors said that the greatest secret of the wealthy and those who become wealthy is that they are constantly engaged in activities that make money--regardless of whether or not those activities would be labeled "work" or "enjoyment".

"While the percentage of households with discretionary income has risen over the past several years, purchasing power remains concentrated in the wallets of the affluent. More than three out of every four discretionary dollars flows to householders earning $100,000 or more," said Lynn Franco, Director of The Conference Board Consumer Research Center.

Definition of Neocons:
Fictitious demons that only exist in the minds of the illiterate or the Regressive Leftist Slavery-mongers.

poor little stephen, he can't help but let his ignorant hatreds do his thinking for him
and no, neocon is just another code word for jew. Has been for years. I'm surprised you didn't get the memo. Or maybe your mommy just didn't read it to you.

No, this is not what the US foreign policy is all about.
I realize in your hatred of all things to the right of Mao, that's probably hard to see. But then thinking for yourself never was your strong suit.

So was that divorce expensive?
You know, when you and REALITY split up?

Show me where Israel has expanded in recent years?
In fact, they have been exchanging land for peace for which they continue to lose both.

It is very interesting to me how Anti-Semitic the left is today. Since Israel is the only functional democracy in the Middle East, how exactly is your position one of promoting freedom and self determination?

Growth is good.

Growth is good.

How many billions of people on earth would like to reach the EU poverty line? If there is no growth billions will remain mired in poverty, burning dung, wood, etc. and trashing the planet.

Growing the economy to raise everone on earth to at least the EU poverty line would be a great and noble goal, no?

The USSR and other socialist states have proven they can't do it. Only free markets and free peoples can.

Da Shrinking Middle Class
One of the biggest reasons for the shrinking middle class, many economists point out, is the fact that more households are rising out of and above it to "affluence" status.

Love that quote. I sure hope Rudy uses it on Shrillary during the REAL debates in late '08.

The only time they have ever expanded is as a result of being attacked.
Iraq is getting pretty close to being a functional democracy.

How many in the EU would love to reach the US poverty line?

I think it's a matter of ***** envy.
Or maybe big ball envy.

Depends on your definitions of "functional" and "close"

Yes, and like Truman, Bush will be viewed as a great president.
I disagree with Bush on many issues and I might even have doubts about the Iraq invasion but if we succeed the payoff will huge.

The benefits of bringing a savage part of the world trapped in the middle ages into the modern world will be priceless.

growth not good?
From what kind of whacko school of economics would you get that idea from; even commie know that you have to have growth, or you get poorer. Give us a scenario, or any example of any static society, even in theory that could survive no growth.

Stephen loves Europe so I taylored it for him.

Israeli expansion
If as you say there were pro-expansion, does that mean they were really disapointed that Israel, gave up the whole, huge, massive, Sinai Penninsula? Oh yeah, they also gave up Gaza. Whoops forgot, they also gave up lebanon. Or do you belive giving ALL that land as a diabolical plot of: lets give up a lot of land so they don't think we're trying to take some land"?

The war is the problem and so is the USA
I knew this would get some attention when I said, USA is the problem. When I said this I speak as a whole the business end of USA. People in general is not the problem.

We have the City,State,Feds, and all in between branches of government adding this fee and that fee and increasing ALL OTHERS, I SAID INCREASING ALL OTHERS, THAT THE POORER population that is growing weekly can no longer afford to spend as usual, pay the above said, and still pay for extra to spur the economy. It is starting to crash and only the rich will be able to prolong it for awhile from happening. The above in this paragraph has forced thousands into being in the income bracket that they can no longer afford to be legal. Their job just does not pay all the expenses, so the Company goes over seas, and we become poorer or take on several part time jobs, and still cannot afford medical care or other needed items for a family. History shows that after you end a war or pull out of it. The economy rebounds and all is well..

It means that politicians should slash and burn, but they won't so down we go.
The Federal Government and its wars, military/industrial complex and old age programs are driving this great country towards ruin. It is as simple as that. The government to fund these unnecessary or damaging programs needs trillions of dollars and it robs them from 3 sources: debt, printing money and taxes.

So until this insanity stops the US will fall until it is on the order of the EU countries with these horrible social spending messes.

This recent adjustment to the value of a dollar is only the warning of bad things to come.

But exports are up? That is the worst. The manufacturing sector in the US depends on equipment and materials from all over the world. Exports up mean we all get poorer.

Increasing Exports equal lower living standards.
Export are climbing fast. Almost as fast as in the Great Depression, aren't we lucky. We have a system that has reduced the value of the currency by 40%. So we are left with the following:
1. Surging exports that should make the manufacturing sector mini-boom until domestic buyers can not afford products as manufacturers have to pay higher prices for materials and equipment.
2. Less US travel over seas yielding to higher prices at home, more people wanting to go to the same places.
3. Inflation adjusted programs like Un-social Insecurity will increase in cost as the government adjusts the payouts for inflation.
4. Stocks will do well, hell Zimbabwe has the fastest growing stock market in the world, increases in wages lag the rest of the economy.

Yup yup yup, DBT
I never liked the war from the start. But, now that we are there, we must win it.

What happened to the Powell doctrine of using overwhelming force? I guess that ain't PC enough for modern warfare.

At any rate, despite the ****-poor strategizing behind it all, assuming that the Democrats don't get their way and we achieve victory, we will have done what the Pentagon wanted done from the start.

This war was never about lies nor about oil. It was about nation-building--allie nation-building. Again, not a strategy that I like nor agree with. But in the end, if it succeeds, it succeeds.

Surging exports in Japan, Korea, Hong Kong, Singapore, and China...
raised their living standards.

And had they been more open and not so export concerned they would have been better.
Hong Kong and Singapore are net importers of goods. The other countries could have been significantly better off had they been more open and less protectionist.

If true, how did Hong Kong and Singapore become net importers?

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