For some time now, the U.S. has been the prettiest house on what is an ugly economic block. Look around: China and many of the other major emerging markets are slowing down, and Europe is in recession. The U.S., on the other hand, finally seems to be moving beyond 2% annual economic growth toward a more robust recovery. The big question is whether it will be a recovery for everyone.
The answer so far seems to be a definitive no. The percentage of Americans in the labor force, arguably the most important measure of economic health, dropped to a 34-year low in May. That's as bad as it's been since women entered the labor force en masse in the 1980s, and it speaks to the fact that this recovery is weaker and has taken longer than rebounds of the past. We're 30 months on from when GDP returned to prerecession levels, but even at June's high level of job creation (195,000) it will take 15 months more to replace the jobs that were lost. While the unemployment figure is slowly ticking downward from the crisis' peak of 10%, it remains in double digits for certain groups, such as young people without college degrees and African Americans. Meanwhile, economic inequality has increased, since minorities were disproportionately hit in the housing crisis, and wages have stayed flat. It's hard to envision an inclusive recovery when a majority of Americans simply haven't got more money in their pockets.
That puts the American Dream at risk. "If young Americans are to live better than their parents did, we have to expand employment, make the workforce more competitive and accelerate productivity growth," which is strongly correlated with rising wages, says Susan Lund, a principal at the McKinsey Global Institute, which just released a report titled "Game Changers" on how to build a more robust recovery in the U.S. One key challenge will be to create more sustainable demand in an economy that is 70% driven by consumer spending. Yes, Americans have gone a long way toward repairing their balance sheets since 2008. Fewer of us have debt than we did back then. But those who do, including vulnerable groups like students and seniors, have 40% more debt than they did before the financial crisis, according to the Census Bureau. And consumer spending is still spotty. While overall retail sales have grown over the past year, June numbers came in far weaker than expected. Department-store sales were down for the fifth month in a row, and restaurant spending was sharply down as consumers once again ate in to save a dollar. People even bought fewer electronic gadgets for a third month running. The latest GDP figure--1.7%--shows we are still struggling to stay in a 2% economy. "To say we're doing better than Europe is meager consolation," says Lund. "We need to do much better."
Of course, the economy is cyclical, and one bad quarter won't derail a recovery. What you want to see is sustained job growth, and the most recent new-hire numbers were stellar. The question is whether they were a blip or a real directional shift from what we've seen over the past several years. Even before the financial crisis, there were signs that the U.S. jobs engine was sputtering. Job creation from 2000 to 2007 was far weaker than in decades past. This is in part because small and new companies, which do much of the real hiring in the U.S., still have problems getting bank loans. Indeed, Urban Institute senior fellow Gene Steuerle believes that one key reason for the declining number of jobs being created by new businesses is that entrepreneurs have exhausted their personal savings, which most of them use in lieu of loans to fund investment. Banks, which claim they are trying to meet higher capital requirements, won't step in to help.
This underscores the fact that five years on from the crisis, finance is still disconnected from the real economy. Sure, banks are recording record profits, but numerous studies show that as finance as a percentage of the economy grows, business creation actually tends to stall. A banking recovery isn't enough to turn the economy around--we need manufacturing and services to grow too. Yes, a manufacturing renaissance is under way. But it isn't your grandfather's manufacturing. Well-paid union jobs have given way to cheaper labor and to robots that do work that people used to do, which is partly why wages have remained flat.
That's just another reason that too many Americans won't feel the buoyancy of this divided rebound for many years to come.