TIME Economy

Economy Takes Biggest Hit Since End of Recession

Polar Vortex drops over United States and Canada
People bundling up in their coats walk outside in New York City, United States, January 7, 2014. Bilgin Sasmaz—Anadolu Agency/Getty Images

GDP contracted by 2.9% in the first quarter

The U.S. economy shrank by 2.9% in the first quarter of 2014, according to newly revised government data Wednesday, its biggest contraction since the end of the recession in 2009.

The revised figure was nearly one percentage point worse than previous estimates, taking into account a more complete set of data that revealed a sharp downturn in exports and a deceleration in consumer spending. Health care spending fell by 0.2%, reversing previous estimates that it would grow as the health care reform law took effect. Exports dropped off by 8.9%, down from 9.5% growth in the previous quarter.

The good news? This is the third and final revision to a quarter in which the economy was walloped by blizzards and crippling cold, and leading indicators point to a rebound in the second quarter.

01_real_gdp_2007-2014

 

MONEY The Economy

Wealth Inequality Doubled Over Last 10 Years, Study Finds

An analysis by researchers at the University of Michigan shows a drastic increase in wealth inequality since 2003.

A new study finds wealth inequality among U.S. households has nearly doubled over the past decade.

The analysis, performed by researchers at the University of Michigan, shows households in the 95th percentile of net worth had 13 times the wealth of the median household in 2003. By 2013, this disparity had increased almost twofold, with the wealthiest 5% of Americans holding 24 times that of the median.

In dollars terms, the median wealth of a US household was $87,992 in 2003, and by 2013 had decreased 36% to $56,335. In contrast, the richest 10% actually saw their net worth increase from 2003 to 2013, with the highest gains going to the top 5%. The median wealth of the households in the top five percent grew over 12% during the same time period, from $1,192,639 to $1,364,834.

The study also shows similar wealth inequality growth between median and poor households. In 2013, the 50th percentile held 17.6 times the wealth of the least wealthy 25%—over twice the disparity found in 2003.

A principal reason for the rapid increase in wealth disparity over the last 10 years is the different ways various economic groups invest their money. According to the study’s lead author, Fabian T. Pfeffer, more than half of the median household’s wealth in 2007 was in home equity. By comparison, the median household in the richest 5th percentile held only 16% of their wealth in home equity, with the lion’s share being kept in real assets, including business assets (49%) and financial instruments like stocks and bonds (25%).

Pfeffer explains that because stocks have recovered more quickly than the real estate market—the S&P reached its pre-recession high in March of 2013, while home prices are still far from their 2006 peak—average households were hurt far more than richer Americans when the housing bubble popped. When home equity is excluded from household wealth, the impact of the housing crash on average Americans is especially clear. A median household’s total net worth declined by $42,000 between 2007 and 2013, but their wealth held in non-real estate assets declined by only $6,900. The Great Recession’s disproportionate impact on real estate allowed the richest households, who could afford to diversify their investments, to grow wealth even during a deflating housing market.

Source: YCharts

Another concern for middle class households is that many sold off investments during the recession in order meet expenses, and are now less able to enjoy the benefits of a recovering economy. “Part of the lack of recovery is that they [median American households] had to divest,” says Pfeffer. “The troubles will stay with them for the next couple of decades as they try to reclaim these assets.”

Will wealth inequality continue to increase at its current pace? Pfeffer believes it would take another deep recession for inequality to double again in the next 10 years, but says his research confirms what economists like best-selling author Thomas Piketty have been saying for years: that returns to capital have been increasing at a rapid pace over the last century, creating a persistently swelling gap between the wealth of the haves and the have-nots. “I don’t see many hopefully signs that we’re going to get back to where we were 10 years ago,” Pfeffer says.

Some have claimed inequality is less important as long as all Americans see wealth gains over time. The rich may get richer faster, but that might not matter if the poor and middle class are also seeing their wealth increase. Pfeffer disagrees. A rising tide may lift all boats, but the Michigan professor points out that wealth not only tends to determine political influence, but also that wealth inequality greatly affects the opportunities available to the children of the middle class, especially in terms of education. “The further families pull apart [in net worth], the more disparate the opportunities become for their offspring,” he says.

MONEY The Economy

Why’s the Job Market Still Weak? Look At These 3 Charts

construction workers
Zigy Kaluzny—Getty Images

Construction, which had been a major engine of job creation before the financial crisis, is now a big drag on hiring.

In May, the U.S. economy added 217,000 jobs, a good-but-not-great showing. The construction industry, however, did little of the heavy lifting — adding only a seasonally adjusted 6,000 positions.

While construction jobs have been slowly recovering since 2011, they’re still nowhere near their pre-financial crisis levels. By contrast, the broader economy has now made up for all the jobs lost in the downturn.

REALJOBS
Source: BLS

Why has construction been so slow to rebuild? One big factor has been housing. There are just a lot fewer people working to build houses after, you know, the biggest housing crisis in a generation. And that’s still the case even though housing has come back some.

ycharts_chart (2)

Another way to view construction’s struggles is to look at the total number of hours worked. In the last month of 2006, construction workers were on the clock for a seasonally adjusted 295.87 million hours. Last month, that number down at just 233.56 million hours. “Unlike the manufacturing and information sectors, the construction sector, which represents 5% of aggregate hours, had experienced a long trend prior to the Great Recession,” writes St. Louis Federal Reserve Bank economist Carlos Garriga.

Aggregate Weekly Hours

The bottom line: The Federal Reserve will most likely continue its accommodative policy (i.e. super-low interest rates) as long as there is a lot of slack in the labor market. And thanks to the weak construction industry, there’s still a lot of room for improvement.

TIME

The Single Most Depressing Thing About the Recession Has Just Been Put Out of Its Misery

The most depressing jobs graph in more than 60 years has finally kicked the bucket thanks to the latest jobs report

The economy gained 217,000 jobs in May, bringing the total number of workers back to its pre-recession peak and finally putting one of the glummest graphs of job creation out of its misery. The graph created by Calculated Risk, below, shows that jobs in our current recession (the red line) took a longer and deeper dive than at any other point since WWII.

EmployRecMay2014

Now, with total employment 98,000 jobs higher than pre-recession levels, the red line is officially history, and hopefully won’t return any time soon.

Not that total employment is the final measure of workforce well-being. After all, the population has grown alongside the job market. The percentage of the working age population in the workforce is still at a decades-long low-point, as Calculated Risk shows compliments of another worrisome graph. There are still plenty of dipping lines to worry about yet.

EmployPopMay2014

Source: Calculated Risk

TIME Fatherhood

Most Stay at Home Dads Not There By Choice

Lynn Koenig—Getty Images/Flickr RF

More dads are raising their kids full time, but that's not necessarily good news.

There has been a sharp rise in the number of fathers staying at home with their kids in the last 25 years, but most of them are not doing it voluntarily. More than a third of full-time non-working dads are there because of illness or disability.

While the at-home dad has become a popular cultural figure, the reality is a little different. A new analysis of Census data from the Pew Research Center has found that in 2012, only 7% of all fathers who live with their kids were at home full time. That’s about 2 million dads at home, down from 2.2 million right at the end of the recession in 2010 but up compared to the 4% in 1989.

But only 21% of the dads now at home say their primary reason for staying home is to take care of their family. The biggest share of them, 35%, say their health prevents them from working, and another 23% say they’re not able to find work. The other quarter are in school or retired or home for other reasons such as working for no pay for a family business.

The large numbers of dads who are home unwillingly is reflected in the economic wellbeing of those families. Almost half of all stay at home fathers live below the poverty line. A fifth of them don’t have a high school diploma. A recent Pew study found that a third of stay at home mothers lived in poverty too, but the figure among non-working dads is much higher.

Fathers who’ve voluntarily eschewed a career in favor of raising their kids full time are still nowhere near the norm, but the numbers are growing. They represent 21% of all stay home dads in 2012. In 1989 they were 5%. Even more surprisingly about half of working dads say they would stay at home to look after their kids if they didn’t have to work, which is roughly the same as the number of moms who say that.

But those pioneering dads still face something of an uphill battle for respect. While Pew has found that about half of the population thinks that the ideal family arrangement is to have mom home with their kids, only 8% of Americans feel that way about dads.

MONEY Shopping

If You’re Average, You’ll Spend $98 Today

Daily consumer spending averaged $98 in May, the highest it has been in six years -- an indication that the economy is heading in the right direction.

If you’re like most consumers, according to a recent Gallup poll, you reported spending an average of $98 in May. That’s $10 higher than April, and the highest monthly average seen since early 2008.

Historically, consumer spending in May tends to be higher than in most other months, as people pile up expenses related to the start of summer—yard work, spring cleaning, barbecues, etc. December is usually a close second, what with holiday parties and gift shopping. Sure enough, the most recent three-day average high for spending was measured over Memorial Day weekend (daily spending: $134), followed by a trio of days right before Christmas 2013 (daily spending: $129).

Since 2009, when consumer spending in May was measured at just $63, there’s been a consistent increase, rising to $90 in May 2013 before hitting $98 this year. In the big picture, the trend may be viewed as an indication of an economy on the upswing—especially when other data, including improving confidence among small and big businesses alike, are factored in.

Another interesting indicator is that the national birth rate, which has fallen over the course of five years and has been viewed as a sign of larger economic strife and uncertainty, appears to have hit bottom. Births were up slightly in 2013 compared to the year before, an indicator that people have been feeling (slightly) better about bringing a baby into the world lately, even with all of the costs and responsibilities of being a parent.

MONEY The Economy

5 Reasons the Economy is Not Headed for Recession

Growth will soon resurface. Cultura RM/Liam Norris—Getty Images

Despite disappointing GDP numbers, the economy is firmly headed higher.

The economy may have slipped out of gear, but it’s not in reverse.

True, a government report released late last week showed that the U.S. economy did actually contract at an annual rate of 1% at the start of the year, which was much worse than consensus forecasts for a 0.5% decline. That marked the first time gross domestic product had actually shrunk since the first quarter of 2011.

This would explain why market interest rates have been falling so much lately — yields on 10-year Treasuries have sunk from 3% to 2.53% this year. In periods of slow or no growth, investors routinely favor fixed income over equities, which pushes bond prices up and yields down.

Before you start bandying about the “R” word, though, let’s keep things in perspective.

A recession is loosely defined by two consecutive quarters of GDP contraction (actually, it’s officially determined by a group of economists at the National Bureau of Economic Research). The economic data released last week represent just one quarter of activity. Plus a survey of 42 economic forecasters by the Federal Reserve Bank of Philadelphia found strong expectations that the economy snapped back in the second quarter. In fact, the economy is thought to have expanded 3.3% in the spring.

What’s more, forecasts for GDP growth for the remainder of the year are on the rise. In the third quarter, the economy is now expected to expand 2.9%, not 2.8% as was previously thought, according to the Philly Fed survey. And fourth-quarter GDP is expected to rise 3.2%, up from earlier forecasts of 2.7%.

Also, there are at least five economic indicators that would confirm the economy is on much surer footing than either the first-quarter GDP report or bond yields would indicate. Among them:

1) The manufacturing economy is improving.
If the economy were on the verge of reversing course, you would at least start seeing the nation’s industrial sector flatten out. Yet as you can see below, that’s not happening.

US Industrial Production Index Chart

US Industrial Production Index data by YCharts

Nor do investors expect it to, which explains why Wall Street continues to bid up shares of economically sensitive sectors like industrials and basic materials faster than the broad market.

^SPX Chart

^SPX data by YCharts

2) Consumers are getting stronger, not weaker.
If consumer spending represent two thirds of the nation’s GDP, then it would be difficult for the economy to slip into recession if households are loosening up their purse strings. Well, retail sales for discretionary purchases (things you don’t really need) with cash has been growing 2%. Meanwhile, discretionary spending on items requiring financing is up much more—5.6%. “Consumers are flexing their muscles again,” says Jack Ablin, chief investment officer for BMO Private Bank.

3) Small business confidence is growing.
One sign the economy is not in dire shape is that “corporate confidence—even among smaller companies—is improving,” says Liz Ann Sonders, chief investment strategist at Charles Schwab. Small companies are often the canaries in the coal mine of a lousy economy. A year before the economy crashed into recession in December 2007, the NFIB Small Business Optimism was already in decline (in fact, it had been falling gradually since the end of 2005). So far this year, the index has climbed, from a reading of 91 in February to 95.

4) Big business is also gaining confidence.
Not only can you see that in booming merger & acquisition activity, but corporations are slowly but surely adding to their payrolls.

US Change in Nonfarm Payrolls Chart

US Change in Nonfarm Payrolls data by YCharts

5) Economic signs that normally offer clues about future activity are running positive, not negative.
The Conference Board’s index of leading economic indicators “has climbed for the twelfth time in 13 months to yet another new cyclical high,” notes Ed Yardeni, president and chief investment strategist at Yardeni Research.

By contrast, in the 12 months leading up to the start of the 2007-2009 recession, the leading economic indicators index had been precipitously falling.

So buck up.

TIME Economy

Americans Splashing The Cash At 2008 Levels, Survey Finds

183274595
Tom Hahn—Getty Images

Gallup survey says consumer spending hit a six-year high in May, a significant $10-a-day increase on the month before

American consumer spending hit a six-year high in May, according to survey results released by Gallup on Monday.

Americans reported spending $98 a day, spiking $10 above the April average and climbing higher than any other point since May of 2008.

Gallup noted that spending was buoyed, in part, by a surge of Memorial Day weekend shopping. Past surveys have typically registered $3 to $6 jumps, but this year, with spending jumping by $10, the results suggest something deeper is stirring in the economy, other than a sudden demand for hot dogs.

TIME Economy

Economy Shrinks for First Time Since 2011

A rail mounted gantry crane, center, as well as a Straddle Carrier, right, used to unload and load a container ship at the Norfolk International Terminal in Norfolk, Va. on March 26, 2014.
A rail mounted gantry crane, center, as well as a Straddle Carrier, right, used to unload and load a container ship at the Norfolk International Terminal in Norfolk, Va. on March 26, 2014. Steve Helber—AP

The U.S.' Gross Domestic Product contracted by 1 percent in the first quarter of 2014, marking the first contraction in years as government economists revised earlier figures by taking stock of additional glum measures

The U.S. economy shrunk by 1% in the first quarter of 2014, according to government data released Thursday, marking the first economic contraction in three years.

The figure, from revised estimates released by the Commerce Department, was revised downwards from an earlier estimate of 0.1% growth in gross domestic product, as government economists took stock of additional glum measures. The Commerce Department noted that on top of a winter wallop to retail and construction, real GDP was dragged down further by a rise in imports and a marked decline in inventory growth. The last time real GDP contracted was in the first quarter of 2011 at the tail end of a punishing recession.

Corporate profits also declined by an estimated 9.8%, the largest drop recorded by the Commerce Department since the fourth quarter of 2008.

Still, analysts predicted that the contraction, while unsettling, would not last into the second quarter. Recent monthly data points to signs of economic life, including a drop in jobless claims and jumps in durable good orders and retail sales.

TIME Economy

Timothy Geithner: This Is Why We Didn’t Hang the Bankers

In the midst of the financial crisis, anger at bankers (who helped create the crisis) was at an all-time high. Former Secretary Treasurer Timothy Geithner explains why the government had no choice but to bail out big financial institutions.

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