What is the Real State of the Economy?
Between the recovery from the pandemic, concerns over inflation, and sweeping economic legislation, there’s been a lot of uncertainty about how the American economy is doing and what the future might hold. With the 2024 election fast approaching, understanding what’s really happening with the economy is key for many voters’ decisions.
Here are some quick key facts about the state of the economy:
- Job Creation Continues. The economy added 187,000 jobs in August 2023 (above the expected 170,000), after adding 157,000 in July, and 105,000 in June. Overall, the economy has added 4 million jobs since President Biden took office (adding August), which includes jobs recovered from those lost during the pandemic and is 3.8 million higher than prior to the pandemic. The labor market’s consistent job growth in recent months has led economic forecasters to revise their expectations of a recession this year and predict the US will not experience such a downturn.
- Unemployment is Low. August marked a slight uptick in the unemployment rate, rising to 3.8% from 3.5% in July as the labor force participation rate grew to 62.8%. This was the 19th straight month since January of 2022 that unemployment remained below 4%.
- The Workforce is Growing. Over the past year, more than 3.1 million Americans joined the workforce, expanding it by nearly 2%. Much of the growth was driven by women: participation for women aged 25-54 reached an all-time high in the summer, with particular increases for mothers with young children.
- GDP is Increasing. During the second fiscal quarter (from April to June 2023), gross domestic product (GDP) grew at a 2.4% rate—a faster rate than the first quarter and above economists’ expectation of 1.8% (the number is also adjusted for inflation). With this, the US ranked highest among the G7 countries for GDP growth from just before the pandemic (third quarter 2019) at 5.3%.
- The Economy is Expanding. Economic growth in the last quarter was mostly driven by business and inventory investment, government purchases, and consumer spending. Spending grew 1.6%, lower than the 4.2% growth in the first quarter, which came from decreasing spending on durable goods like vehicles and utilities (washers and driers, for example) and shifting spending towards services. Slower spending comes from falling demand, which the Federal Reserve has pursued through raising interest rates to stem inflation.
- Wages are Growing. June saw the real average weekly wages for US workers grow for the first time in 26 months, increasing 0.6% on an annual basis from June 2022. Essentially this meant that as wages rose and the inflation rate fell, the purchasing power of what workers earn actually increased, allowing consumers to buy more with what they earn.
- Productivity is Up. 2023’s second quarter also witnessed a significant increase in productivity from workers. This was accompanied by a sizeable shift away from low-skilled, low-paying jobs into higher-skilled, higher-paying ones. Employee happiness also rose to levels not recorded in many years, partly driven by workers taking jobs that more closely fit their lifestyles and particular interests.
- Inflation is Slowing. Inflation has fallen significantly below the highs of the last two years: the annual inflation rate slowed to 3% in June, down from 4% in May. This marked the twelfth straight month of decrease in the inflation rate from 9.1% in June of 2022, and marks the lowest rate since March of 2021. Data released for July found that inflation ticked back up slightly to 2% for the July annual period.
This is all good news. What’s driving it?
A major factor is major economic bills passed during the current Administration —the Bipartisan Infrastructure Law (2021), the Inflation Reduction Act (2022), and the Chips Act (2022). These legislative moves aimed to boost investment in research and development (R&D), manufacturing, and overall productivity to strengthen the economy in both the short and long terms. A major focus was put on supporting the growth of renewable and clean technologies and industries—the bills provided over $400 billion in loans, grants, and tax credits to build domestic production of semiconductors, electric vehicles (EVs), and more.
So far, the laws seem to be working. Companies announced pledges of almost $50 billion in semiconductor production investment the week that the Chips bill passed. Plans have also been announced to build new EV and electric battery manufacturing plants in the US—what’s more, many of the plans will put those factories in midwestern and southern small towns. So far, $128 billion in investment for EV, electric battery, and battery recycling plants was announced in 2022 alone. The number of manufacturing projects backed by foreign direct investment (FDI) grew from 385 in 2021 to 429 in 2022, with at least 166 announced in 2023 as of early July.
Pledges for tens of billions in new projects were made after the 2022 legislative acts were passed, including more than 75 announcements for large-scale manufacturing projects. A sharp increase in manufacturing investment occurred after the passage of the 2021 and 2022 bills. Manufacturing was already growing before the bills were passed, but industry leaders have credited them as boons for the industry, with US Steel’s CEO even dubbing the IRA the “Manufacturing Renaissance Act.” Business spending grew strongly in 2023’s second quarter, with economists directly linking investments in structure and construction spending with the legislation.
These bills are not only strengthening the manufacturing and clean technology industries here in the US but are simultaneously helping the country meet its climate targets. Scientists expect that the IRA specifically brings the nation “significantly closer” to its 2030 climate target of reducing greenhouse gas emissions to 50-52% below its 2005 levels, predicting a decrease in expected emissions down to 33-40% below 2005 levels, ahead of the previously expected 25-31% below 2005 levels.
Taken as a whole, America’s economy is currently in a strong position and has recovered well since the COVID pandemic’s impact. Yet a significant number of Americans don’t seem to have the full picture: only 33% of adults in a May poll approved of the current Administration’s economic stewardship, and only 24% said they felt that economic conditions were good. These positions are likely affected by the ongoing struggles with inflation, and all of the publicity around high consumer prices as the pandemic ended, driven in large part by corporations raising their prices and reaping economic windfalls at the expense of consumers.
The bottom line is the economy is doing well. But behind the numbers there is a very important story that may not be obvious. The direction the government is taking is the exact opposite of what has driven economic policy since 1981. At that time, supply side economics was adopted as the prevalent philosophy. This meant tax cuts for the wealthy and for corporations on the theory that these savings would be invested and everyone would benefit. What actually happened is the national debt exploded, and the gap between the wealthy and the average American widened.
The focus on the last two years has been a reversal of these trends, going back to the policies from 1931 to 1981. This approach originated under Roosevelt and the New Deal; they stressed fiscal responsibility and support for a better life for the average Americans. This approach was successful during that time, and it appears to be working again today. As an example, take the differing approaches between Biden and Trump to create this boost in manufacturing. While a survey of businesses found that 84% said they didn’t increase hiring because of 2017’s Tax Cuts and Jobs Act, the recent infrastructure bills seem to be generating the growth and investment they were looking for.
Fakchex will be introducing a quarterly update on the state of the economy to keep up with economic activity. Stay tuned for more developments.
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