Unrealized Potential: A Glance at Our Economy

by Anirban Basu 21. October 2013

Anirban Basu

Despite a growth rate that has averaged more than 3 percent over the past 25 years and an unmatched capacity to create and support a host of powerful companies ranging from Google and Coca-Cola to Boeing and Caterpillar, the U.S. economy has been stuck at 2 percent growth for several years. Imagine a sports car with incredible get up and go that has had to continuously negotiate a series of speed bumps. Economically, these take the form of higher tax rates, sequestration, rising interest rates, a recently resolved federal shut down, and the uncertainties associated with healthcare reform. The upshot – 2013 will go down as yet another disappointing year for the U.S. economy.

While the government reached a deal to reopen the government, the 16-day shutdown and a standoff regarding the federal debt limit, cost the nation’s economy $24 billion according to an S&P estimate. Furthermore, according to the Conference Board, the economy is set to expand at just 1.7 percent on an annualized basis during the fourth quarter. In other words, the economy may not be entering 2014 with much momentum.

U.S. equity markets, however, have generally continued to surge higher. As of October 10, 2013, the Dow was up nearly five percent since the onset of the third quarter and up nearly 16 percent year-to-date. The Nasdaq Composite was up nearly 21 percent year-to-date as of October 10th, which happened to be 10 days into the federal government shutdown.

The rebound in equity markets is attributable to numerous factors. One is a still expanding, though somewhat disappointing U.S. economy. Corporate profitability and ongoing injections of liquidity into the economy by the U.S. Federal Reserve have also contributed to appreciating share prices.

Of course, Federal Reserve policy influences more than stock prices. Consumers have leveraged low interest rates, including through the purchase of new cars and light trucks. Sales of new vehicles in the U.S. are on pace to exceed 15 million in 2013.

The Federal Reserve will continue to focus on accelerating economic growth as long as inflation remains tame. For now, inflation is not a major issues. Consumer prices rose just 0.1 percent in August after climbing a similarly benign 0.2 percent in July. Despite large jumps in February and June (0.7 and 0.5 percent, respectively), trend inflation remains well within the Federal Reserve’s comfort zone.

Labor market performance remains mixed. While it is true that unemployment fell to 7.3 percent in August, the lowest rate recorded since December 2008, the decline was primarily attributable to the 312,000 people who left the labor force. Only 63.2 percent of Americans presently participate in the labor force, the lowest proportion since August 1978.

Maryland's economy added 43,300 jobs or 1.7 percent to aggregate nonfarm payrolls. Because Maryland is a wealthy state, it is likely that consumers here benefit more on average from the stock market’s rally. This may help explain some of the state’s demonstrated capacity to withstand federally-induced headwinds. According to the most recently available data, statewide nonfarm employment stands at 2,616,200 jobs, a record high.

Looking Ahead

As of this writing, America’s government has been reopened for less than 24 hours. Although the nation was not foolish enough to tempt fate through default, the government could again close on January 15th, less than three months from now. This means that Washington, D.C. will continue to be a source of fixation and uncertainty among the nation’s business decision-makers. That uncertainly will likely prevent the economy from accelerating to 3 percent growth next year. Another 2 percent year is quite possible.

Anirban Basu, Economist, Sage Policy Group, Inc. & First Mariner Bank Board Member

Anirban Basu is Chairman & CEO of Sage Policy Group, Inc., an economic and policy consulting firm in Baltimore, Maryland. Basu is one of the Mid-Atlantic region's most recognizable economists, in part because of his consulting work on behalf of numerous clients, including prominent developers, bankers, brokerage houses, energy suppliers and law firms. On behalf of government agencies and non-profit organizations, Basu has written several high-profile economic development strategies, including co-authoring Baltimore City's economic growth strategy. His opinions do not necessarily reflect the opinions and beliefs of 1st Mariner Bank.

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