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Where are the jobs now, nearly four years after the recession began?
While it looks like we’re ending 2011 on high note, with respectable growth, employment and investment numbers in the final quarter of the year, on the whole, we’ve had twelve months of economic heartburn. High levels of unemployment affected millions of Americans and raised questions about just how long the United States can continue to guarantee a minimum of prosperity to anyone willing to work for it. Struggling gamely to recover from the financial crisis and recession, the U.S. economy has grown at an increasingly fast pace this year and helped reduce unemployment, yet it hasn’t expanded enough to provide sufficient jobs. Here are the six biggest acts of god and unforced errors that helped hold back the U.S. economy this year.
Japan’s Tsunami and Thailand’s Floods
When an undersea earthquake and ensuing tsunami hit northern Japan in March, the human damage was awful, as flood waters and collapsing buildings claimed some 16,000 deaths and more injuries. It was the most expensive natural disaster on record, with damages estimated at $235 billion. The catastrophe, which included a nuclear reactor leak, kept financial markets on edge for weeks and increased uncertainty at a time when confidence was needed. While impact on the U.S. economy from trade was likely small—our exports there make up than one percent of the economy—it came in a quarter where economists measured only a .4 percent increase in the size of the economy.
The biggest problem may come in the future: Japan’s climbing public debt load is the highest in the world, and the costs of the disaster won’t help them reduce it; at a time of sovereign debt crises, that’s a real worry. But Japan wasn’t all bad news for Americans: Disrupted supply chains hurt inventory at U.S. dealerships that sell Japanese cars, helping American companies increase their market share.
Later this year, monsoon season had Thailand facing terrible flooding that amounted to the fourth costliest disaster on record. It, too, has had troubling effects on the U.S. economy. The country plays a greater role in manufacturing than Japan does, with factories in the U.S. that rely on parts from Thailand cutting production.
Natural Disasters Across the Country
The United States faced its share of natural disasters this year, too. In fact, 2011 was one of the worst years for extreme weather on record, with ten different billion dollar-plus disasters. Blizzards started off the year by freezing out much of the country. The spring brought tornadoes and flooding to the midwest, causing additional damage. Heat waves swamped the country all summer, setting the stage for major wildfires in Texas. And Hurricane Irene pummeled the Northeast this fall. All those disasters could cost $55 billion, according to the National Oceanic and Atmospheric Administration. Besides the cost of reconstruction, businesses weren’t open, workers weren’t going into work and investors were getting nervous. It all adds up to another drag on the U.S. economy.
Oil prices have a major affect on the economy: Consumers purchase petroleum products to make their cars go and heat their homes, and if they are spending more on gas, they’re spending less on everything else. Many manufacturers rely on petroleum product as a key ingredient in everything from plastics to fertilizer, and price increases at oil companies cascade out into the economy. Oil prices have been rising steadily all year thanks to tensions with Iran, disruptions in the market caused by the Arab Spring movement (especially the civil war in Libya), speculators in the commodities markets and most importantly, increasing global demand for an increasingly limited supply.
At the beginning of the year, forecasters at Macroeconomics Advisers said that a $10-per-barrel increase in oil prices would reduce economic growth by about two-tenths of a percent on the year, and sure enough, prices rose that much, to above $100 a barrel. It doesn’t sound like a lot, but if the economy grows just three or four percent this year, it would be a major victory.
The End of Stimulus
This year saw the last of the spending from the 2009 economic stimulus act, which the non-partisan Congressional Budget Office says added one to three percent to economic growth we wouldn’t otherwise have and created between 1.6 million and 4.6 million jobs. As public spending decreased, there were fears that the private sector wasn’t yet ready to step into the gap, which is one reason the economy grew much more in 2010 than it did this year. At the same time, the Federal Reserve’s efforts to keep interest rates low, called “QE II,” also came to an end, hurting investment. While the Fed has promised to keep credit conditions loose, it has not engaged in the broader efforts needed to help promote recovery in the United States.
Besides the end of stimulus, U.S. politicians missed the opportunity to create additional economic stimulus. Many economists argued that the best public policy solution would be to front-load additional spending now to support growth while laying out a credible plan for reducing the U.S.’s untenably high deficits, but it never happened. Which brings us to…
Photo courtesy the U.S. Government
The U.S. Debt Default Battle
Driven by a newly-elected Republican majority in the House, Congress spent the first six months of the year debating draconian spending cuts. While the cuts reduce deficits, they also are crippling for near-term economic growth and would have dramatically reduced the economy’s ability to grow. House Republicans insisted on linking spending decisions to a technical mechanism that allows the United States to borrow money for spending Congress had already approved, creating brinksmanship that roiled international financial markets, kept policymakers from focusing on jobs, and ultimately resulted in the U.S. losing its triple-A credit rating for the first time in history.
The verdict from the ratings agencies was more a warning about our tumultuous political process than an assessment of the country’s economic fundamentals, and thanks to turmoil abroad, Treasury bond rates remain low. But the judgement doesn't bode well for the government's ability to put the federal budget on a sustainable path.
Speaking of financial chaos around the world, what about…
Photo courtesy the U.S. Government
The Euro Crisis
The European financial crisis has been one of the biggest economic destabilizers in the past year. As fears spread that countries like Greece, Italy, Spain, and Ireland won't be able to repay loans—largely made by banks in Euro giants Germany and France—nervous financial markets have begun to abandon European debt, driving up borrowing costs and sending some countries into a vicious cycle of austerity and low growth.
European leaders, like Germany's Angela Merkel and France's Nicolas Sarkozy, above, struggled to get ahead of the markets by finding enough money to backstop affected countries’ loans and solve the complex problems at the heart of the Euro, each successive failure to find a solution—from the June protests in Greece that forced bondholders to take haircuts to the ouster of leaders in both Italy and Greece—has increased uncertainty, hurt markets and lead to tightening credit.
That’s not all: As growth slows in Europe, it’s going to be trouble for Americans (the EU is our second-largest trading partner) and as the value of the Euro falls, European exporters will become a cheaper alternative to American manufacturers on the global market. Bank failures in Europe could hit our still-fragile financial system, too, hurting 401ks and making it harder for businesses and consumers to borrow money.
Right now, it’s still possible that the Euro leaders current plan to muddle through the crisis without wholesale reform will work, but if it doesn’t, get ready for another shaky 2012.