Economy

Despite growth, experts skeptical US recovering from recession

Experts warn US economy is still far away from a full recovery, even with the strongest growth figures in 11 years

24.12.2014 - Update : 24.12.2014
Despite growth, experts skeptical US recovering from recession

By Mustafa Caglayan

NEW YORK

The U.S. economy on Tuesday posted its fastest expansion in more than a decade, but experts warn that there may be a dark cloud to this silver lining.

Official figures show that the gross domestic product -- the broadest measure of economic output and growth -- grew at its fastest rate since 2003, surging 5 percent in the third quarter.

Supported by increased consumer and business spending, the boom helped spur the Dow Jones to soar above 18,000 points for the first time, while the S&P 500 also climbed, adding 3.63 points to 2,082.

Experts, however, warn that the impressive growth is not likely to be repeated and it may lead to unwanted backlashes as long as the U.S. economy is not yet back on a path to a sustainable robust recovery.

"Roughly 0.8 percentage points of the growth came from reductions in the trade deficit and increased military spending. The data released since the end of the quarter indicates that the deficit is likely to grow rather than shrink the fourth quarter. Also, military spending is highly erratic," said Dean Baker, co-director of the Center for Economic and Policy Research.

"It is virtually certain we will see a sharp decline in the fourth quarter," he added.

The latest figure is the third estimate issued by the Commerce Department. Earlier forecasts set growth just below 4 percent. The third quarter boom followed a 4.6 percent annual growth rate in the preceding quarter.

"There is no reason to think we are on a qualitatively faster growth path. Growth will likely be close to 2 percent in the fourth quarter and a bit higher in 2015," Baker said.

He said the figures were still close to 4 percentage points below the nation’s potential gross domestic product and making up the ground lost in the recession at a very slow pace.

The U.S. economy has been struggling to recover from the repercussions of a major 2007 subprime mortgage crisis, which created a domino effect that toppled many of the world’s major economies and led to a global recession.

The recession ended in 2009 after the U.S. responded by bailing out distressed financial institutions and pumping government money into the economy, but growth has struggled to return to its previous levels. The growth rate floated at an average of 2.2 percent since June 2009, compared with 3.3 percent in 2005.

Randall Wray, professor of economics at the University of Missouri-Kansas City, also voiced skepticism about how close the U.S. economy is to a healthy status.

"I’m concerned that inequality has continued to grow and that all the growth in income has been taken by the very top of the income distribution," he said.

He said a question that needs to be asked is whether Americans have enough income to support the growth in spending.

A recent decision by the Federal Reserve Bank of New York to end a five-year run of household debt deleveraging was a "scary thing" although it was widely reported as good news, he said. Deleveraging is a process in which borrowers reduce their debt loads by repaying debts.

"Households need to retrench more, redeem more of their debt rather than stirring to increase borrowing. I think that is one big area of worry, the income equality and lack of growth of income for the vast majority of Americans," Wray said.

David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, said that although the economy notching up its fastest expansion in 11 years is encouraging, the question is whether it will continue.

"My answer to that question is 'it depends'. If the (crude) oil prices continue to be very low and the stock market continues to go up, and if we avoid some scary war in the Middle East or some show down with (Russian President Vladimir) Putin in Europe then I think the pieces are falling into place for 2015 to be a pretty good year," he said.

He said some elements of the economy showed signs of recovery from the recession, including factories that began to produce as much as they did before the crisis.

"But when you look at the incomes of the people in the middle class and their wages, they are still pretty lousy. A lot of individuals have not really recovered," he said.

Josh Bivens, research and policy director at the Economic Policy Institute, said recent "good news" on the economy should not make policy makers lose sight of how far away from a full recovery the U.S. economy remains.

"We’re climbing more rapidly out of the hole that the Great Recession left us in, but we’re still really only halfway there," he said in a commentary posted online.

"You can see this measured in terms of how many jobs we need to restore the labor market health that prevailed immediately before the Great Recession began, or in the share of 'prime-age' adults (ages 25-54) that have jobs. And in terms of restoring average wage growth we’re not even halfway there. In fact, we’re still essentially nowhere yet," he said.

He said growing relatively fast is what is supposed to happen following recessions.

Meanwhile, an improved economic outlook helped to push President Barack Obama's approval rating to a 20-month high, according to a recent poll conducted by CNN/ORC.

At 48 percent, the president's approval rating is at its highest point in CNN polling since May 2013, the report said.

Another survey, produced for ABC News/Washington Post, showed that in early November a record-low number of Americans held a favorable view of Obama and his understanding of their problems.

The falling ratings were cited as a major factor in Democrats losing control of both houses of Congress in the November midterm elections.

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