(Archived Content)
Janice Eberly
Assistant Secretary for Economic Policy
Statement for the Treasury Borrowing Advisory Committee
of the Securities Industry and Financial Markets Association
October 31, 2011
The pace of expansion accelerated during the summer as the temporary factors that weighed on growth in the first half of the year largely faded. According to the advance report released last week, the economy grew by 2.5 percent at an annual rate in the third quarter, the ninth straight quarter of growth since the recession ended in mid-2009. Real GDP surpassed the prerecession peak recorded in the fourth quarter of 2007. Despite the pickup in growth, job growth moderated, and the unemployment rate remained unacceptably high at 9.1 percent. Private sector forecasters expect the pace of growth to strengthen gradually going forward, but the unemployment rate is not projected to decline meaningfully over the next year. The Administration recently proposed a number of initiatives in the American Jobs Act that will foster job creation and stronger near-term growth. The longer-term fiscal situation remains a serious concern, however, and in mid September the President proposed a balanced and comprehensive deficit reduction plan that will put the nation’s finances on a fiscally sustainable path.
The acceleration in real GDP growth from a tepid 0.8 percent pace in the first half of the year to a 2.5 percent annual rate in the third quarter was due primarily to a pickup in consumer spending and business investment. Growth of personal consumption expenditures accelerated in the third quarter to a 2.4 percent pace from just 0.7 percent in the second quarter, contributing 1.7 percentage points to GDP growth. Nonresidential fixed investment surged by more than 16 percent, reflecting rapid growth of equipment and software spending. Investment in equipment and software remains a source of strength in the economy and has contributed positively to GDP growth in each quarter since the recovery began. Private domestic final purchases (the sum of consumption, business fixed investment, and residential investment) accelerated sharply to a 4 percent annual rate from just under 2 percent in the first half of the year. The strength of underlying private demand suggests the recovery has regained some forward momentum after being held back in the first half of the year by a number of headwinds, including surging energy prices and supply-chain disruptions related to the disaster in Japan.
By the end of the summer, the supply-chain disruptions that depressed U.S. automotive output and motor vehicle sales had largely subsided. Motor vehicle output rose in the third quarter, making a small positive contribution to GDP growth after posing a substantial drag on the economy in the second quarter. Motor vehicle sales have returned to their pre-tsunami levels – at 13 million units in September, sales were more than 10 percent higher than a year earlier. Energy prices have declined from the peak levels recorded in the spring. Oil prices have fallen from well over $100 per barrel at the end of April to roughly $93 presently. More meaningfully for households, retail gasoline prices have eased from nearly $4 per gallon in May to about $3.50 per gallon.
In the labor market, hiring slowed notably during the summer but picked up in September, with 103,000 workers added to nonfarm payrolls. While the unemployment rate held steady at 9.1 percent, the labor market participation rate, length of the average workweek, and average hourly earnings all increased slightly September. Although these improvements are off of low levels, they are nonetheless encouraging signs. Nevertheless, nonfarm payrolls remain 6.6 million below their pre-recession level, and the share of workers who have been unemployed for 27 weeks or more is still very high at 44.6 percent.
The housing market remains a point of weakness and is unlikely to show significant improvement in the near term. Sales remain very weak. New single-family home sales rose in September for the first time in four months but remained near historically low levels. Existing home sales fell and are down on net since the beginning of the year. The inventory of homes available for sale has been falling but is still very high relative to the current pace of sales. As a result, new home building remains depressed, and single-family housing starts are poised to hit a new yearly low in 2011. House price measures have started to stabilize in recent months but remain under pressure from high inventories and weak demand. The share of mortgages that are delinquent or in foreclosure is still very high.
Aside from housing, a number of other factors are also weighing on the economy. Household budgets remain under pressure. Real disposable personal income fell 1.7 percent at an annual rate in the third quarter, the first decline since late 2009. Recovery in household wealth stalled in the second quarter, and credit growth remains constrained by tight lending standards and ongoing household balance sheet restructuring. In the public sector, state and local budget are also constrained and employment, particularly at the local level, continues to decline. In addition, the slowdown in global growth already underway will likely have negative implications for U.S. exports, which have been another important source of strength for the U.S. economy over the past two years. Uncertainty about global growth prospects and, in particular, sovereign debt strains in Europe, contributed to a pronounced rise in volatility in U.S. and global financial markets over the past several months. While a full-blown European financial crisis appears less likely in light of the plan put forward by European leaders last week, the risk of recession in the Eurozone remains. This would have serious consequences for global growth and trade flows.
In economic policy, we have twin imperatives: to support growth in the economy as it heals from the Great Recession and financial crisis, and to implement a credible plan for long-term fiscal consolidation. These goals need not be mutually exclusive. Indeed, addressing the challenge of unsustainable budget deficits creates room to implement policies that will spur faster economic growth. In mid-September, the President put forth a plan that goes well beyond the nearly $1 trillion in deficit reduction enacted under the Budget Control Act, which was signed into law on August 2. The President’s plan would produce an additional $3 trillion in fiscal savings over the next ten years. Importantly, the President’s plan would put the national debt on a declining path as a share of the economy by the middle of the decade.
The President also remains committed to putting the unemployment rate on a declining path and will continue to pursue policies aimed at boosting job growth, including those proposed in the Administration’s American Jobs Act. Altogether, the provisions included in the American Jobs Act would provide $447 billion in targeted support for the economy next year. The President’s proposals would increase household disposable income and private consumption, spur infrastructure investment, prevent hundreds of thousands of teachers from being laid off, and reform our unemployment insurance system to make it easier for the unemployed to get back to work. Just last week, the President announced several additional measures that will help spur growth in the near term, including initiatives to help homeowners with their mortgage payments, students with their federal loans, and veterans with their job searches. All of these measures are designed to provide immediate benefits to the American people and the economy, but they will also provide longer-term benefits, including enhanced productivity and competitiveness, that will boost our standard of living.