With only 18,000 jobs created in June, the US economic recovery has gone badly wrong.
Once upon a time, the US economy was the envy of the world. It is no longer. Despite massive stimulus of both the monetary and the fiscal kind, it is struggling to break free from its post-financial crisis torpor. The level of economic activity today is barely higher than it was at the start of 2008. The unemployment rate remains stubbornly above 9 per cent. And jobs are hard to come by. In the good old days, the US economy could happily generate 250,000 to 500,000 jobs per month. That performance is now no more than a distant memory.
The US is limping along. And, as time goes by, the limp is becoming ever-more-pronounced. The rot set in long before the advent of the financial crisis.
People used to believe, as a matter of routine, that the US economy could grow at around 3 per cent a year in real terms, well ahead of the pace achieved by the arthritic European nations. Indeed, back in the 1980s and 1990s, the pace of economic expansion was often well above 3 per cent, enabling Americans to gloat even as other parts of the world stagnated. Today, however, America is also in danger of stagnating. And now others are gloating.
Economists typically measure long-run economic performance by looking beyond the cyclical ups and downs that inevitably punctuate a nation's growth trajectory in the short-term. One way to do this is to look at economic growth on either a peak-to-peak or trough-to-trough basis, thereby taking snapshots of the level of economic activity at equivalent points across economic cycles.
Using this approach, it seems that growth through the Bush years and at the beginning of the Obama years slumped to only 2 per cent per annum. By US standards, this is remarkably unimpressive. It looks even worse in the context of the amazingly rapid growth rates now being achieved by new economic superpowers such as China, India and Brazil.
So what's gone wrong? The problems began with the late-1990s euphoria linked to the so-called "new economy", when the US stock market soared into the stratosphere. The subsequent crash at first seemed to offer a major wake-up call. The downward spiral in the stock market was followed by a major economic slowdown. As it turned out, however, the recession that followed was remarkably mild. Even if the "new economy" was more dream than reality, US policymakers demonstrated a knack of turning dreams into reality without too much collateral damage. Investors breathed a collective sigh of relief.
Yet, in the attempt to keep the economy's head above water, policymakers helped create the conditions that led, years later, to the financial crisis. Interest rates were set at shockingly-low levels. The Bush tax cuts gave a shot in the arm to US consumers. Like the Clinton administration before it, the Bush administration actively encouraged property ownership, supporting the growth of the sub-prime market. Inevitably, housing investment boomed. The productivity revolution associated with the technology bubble was quickly forgotten. Instead, the US became hooked on real estate.
When the real estate bubble burst, America's policymakers tried to offer the same "fix" again. Interest rates tumbled. The budget deficit expanded massively. The Federal Reserve even resorted to printing money via quantitative easing. Yet, despite all this effort, the economy has simply refused to bounce back.
Companies are awash with money but they prefer to save rather than invest (and, if they are investing, they'd rather do it in China or Brazil than in their own nation). Households are still up to their eyeballs in debt and, with house prices constantly falling, feeling more and more impoverished. And the US government finds itself saddled with one of the biggest budget deficits in the world (measured as a share of GDP) and a seemingly out-of-control increase in government debt.
It is debt which is now proving to be the American economy's nemesis. While the political noise coming from the debt ceiling debate will continue to dominate the airwaves in the next few weeks (unless the debt ceiling is increased, the US Treasury will start defaulting to its creditors in early August, suggesting that, despite all the hot air, an 11th-hour increase will eventually transpire), the bigger concern surely relates to the outlook further out.
The Congressional Budget Office assumes that US economic growth will return to the 3 per cent path in the years ahead. The swagger of old, in other words, will be back. Yet this assumption may no longer be safe.
Imagine, for example, that all that investment in housing has permanently damaged the US outlook. Imagine that the labour market will remain weak, that investment will remain low and that growth will remain at 2 per cent rather than 3 per cent for the foreseeable future. Federal, state and local governments would then be left short of revenues to fund their spending plans.
Then consider the generous promises already made to the US people regarding the future expansion of social security and healthcare provision. Put all these together and you have a recipe for an ever-bigger budget deficit. It's Greece or Ireland but on the grandest of scales.
A persistently-large budget deficit risks the creation of a vicious circle. Households and companies hold back on spending, fearing a higher future tax bill. Individuals save more, anticipating the scaling back of entitlement programmes. Banks lend less, worried that they will be required to buy more government bonds to boost their capital under the guise of heightened "macro-prudential supervision". International investors shun treasuries, driving down the dollar and, thus, raising import prices for already-cash-strapped American consumers.
Cutting interest rates and raising government borrowing may have prevented the nightmare "Great Depression Mark II" scenario but there is scant evidence to suggest that these policies have returned the US economy to the vigour of old. In reality, the US is wheezing, weighed down by past excesses. The weak labour market is but one example of this shortage of breath. It is, however, a highly symbolic example, particularly given the dynamism of yesteryear.
And it's not merely that jobs have been lost. One of the most disturbing elements of America's current malaise has been the rise in long-term unemployment. Those who've lost their job cannot easily find a new one.
In the good old days, Americans who had been unlucky enough to end up unemployed could find new work relatively quickly. Today, that's no longer true. People are being left on the economic shelf, hit by the downturn in housing and their own negative equity, making it more difficult for them to go in search of work in other US states.
It's a new experience for US citizens. And it's one that shows, above all, that the American economy has lost its mojo.