Reasons for a Historically Weak Economic Recovery
Most recessions are brought about by rising interest rates. In order to slow an overheating economy, the Federal Reserve raises short-term rates, thereby increasing borrowing costs. As a result of these increased borrowing costs, consumers and businesses alike reduce their borrowing until interest rates once again decline to more attractive levels. Once this occurs, borrowing recommences. This past recession was not brought about by higher interest rates but rather by the fact that consumers and businesses alike became overleveraged. Both had too much debt on their balance sheets. In order to help the process of unwinding or deleveraging in which consumers and businesses pay down this debt the Federal Reserve did lower rates. However, businesses and consumers are reluctant to begin borrowing in earnest until they deleverage. And that takes time. Therefore, the historically slow pace of economic growth ever since the economy bottomed in 2009 cannot be cured by low interest rates. It is a question of demand, and once again, the passage of time that will allow the completion of the process of deleveraging.
The lowering of interest rates as well as other unconventional steps taken by the Federal Reserve over the past five-plus years in order to first stabilize and then help grow the economy has, in our opinion, been nothing short of brilliant. However, that is only part of the equation. In addition to the nature of the recession, what has hampered the pace of this economic recovery, is a lack of a Fiscal Policy implemented by Congress and the Obama Administration. We will let Wikipedia define fiscal policy:
“In economics and political science, fiscal policy is the use of government revenue collection and expenditures to influence the economy, or else it involves the government changing the levels of taxation and government spending in order to influence Aggregate Demand and the level of economic activity.”
More or less, the dysfunction in Washington has prevented the implantation of an effective fiscal policy to deal with the current economic environment.
Economic recoveries are built on the backs of the housing and labor markets, both which have been recovering, but at a modest pace at best. For instance, despite the recent pick-up, Sales of New Homes are nearly sixty-six percent below their peak set back in July 2005 of 1,279,000 units. Furthermore, the Median Existing-Home Sales Price remains 12.42% below their all-time high of $230,300 set back nearly eight years ago, July 2006.
If as we stated above that recoveries are built on the back of the housing market, then let us take one step further and note that the housing market is built on the backs of first-time home buyers. In addition to more stringent terms demanded by lenders, over the past ten years student debt has tripled to more than $1 trillion while wage growth has been somewhat stagnant. In fact, according to the Federal Reserve Bank of New York, student loan delinquencies have surpassed that of credit card balances for the first time. Certainly, overwhelming student debt coupled with stagnant wage growth is not the recipe for a booming housing market.
Also not in the recipe for a strong recovery is a relatively weak labor market. As of the most recent report from the Bureau of Labor Statistics, a record 92,594,000 Americans were not in the labor force during April. This combination of Americans dropping out of the labor force coupled with a rising population helped push the labor force participation rate down to 62.8%, the lowest level since March 1978.
As noted above, only time heals balance-sheet recessions, but we believe this length of time can be shortened if politicians can craft a sound fiscal policy, one that initially focuses on jobs and one that addresses the crushing level of student debt.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.