As we head into 2018, I still occasionally see arguments about the U.S. economy based on data that do not cover the years from 2014 to present. There is presumably nothing wrong with pre-2014 data, but it is worth keeping in mind that the economy looks a lot better since 2014. Perhaps most notably, wages and employment prospects improve for large portions of the population, an encouraging change in direction after many consecutive years of loss or stagnation. Recent data show a stronger economy coexisting comfortably with the environmental and labor policies of the past four years.
Specifically, three major pieces of the U.S. economic growth puzzle fall into place around 2014 and boost growth each year since: lower oil and energy prices, tighter labor markets, and available low-cost credit. These are discussed below and captured by the period averages in table 1.
Savings on energy boosted household finances
First, the price of oil fell sharply in 2014 and has remained low due to slowed demand from China, a large increase in domestic oil and gas production, increased green energy production, and more efficient energy use (for example more hybrid and electric cars). Several years with an average discount of 35 percent on oil, and similar discounts on other sources of energy, has improved household finances and boosted the economy. It translates to higher real income for Americans facing lower prices less at the pump, at the store, and on utilities.
Household spending on gasoline and similar fuels accounted for 2.5 percent of U.S. GDP from 2010 to 2014, but has fallen to an average of less than 1.8 percent of GDP from 2014 onward and is currently down to around 1.5 percent of GDP. Rather than save the money left over from less expensive commutes, which could have the effect of slowing the economy, Americans have turned it into new spending. Meanwhile, U.S. energy production has been expanding despite lower prices for gas and oil, thanks in part to increased export capabilities. Reasonably good fortune for both consumers and producers in the industry does not scream overly burdensome regulation.
Yellen pushed unemployment lower than expected
Next, the unemployment rate is currently much lower than many economists had believed it could go, and the Fed should get some credit for this. In January 2014, the unemployment rate was 6.6 percent and 76.4 percent of Americans age 25-54 had jobs. Instead of responding to missing-yet-theoretically-predicted inflation as the unemployment rate neared 5.5 percent, Chair Yellen’s Fed allowed the rate to fall to the current 4.1 percent. As of November 2017, inflation is low and stable and 79 percent of Americans age 25-54 have jobs, an increase over the January 2014 level equivalent to 3.3 million jobs. The rebound in employment for ‘working-age’ Americans should bring pause to claims that the economy has permanently written off portions of its previous workforce. The economy is not only still adding jobs at a rapid pace, but it is still pulling workers off of the sidelines and into the labor market. These trend are even more pronounced for black and Hispanic Americans.
Critically, when we near full employment, as we are doing now, there are no longer huge numbers of available unemployed workers to compete for new jobs or to replace workers who quit. As unemployed workers become scarce, businesses must increasingly compete with each other as employers. They do so by raising wages and making jobs better, and by better training and equipping existing workers. Benefits of full employment therefore include both increased wages and increased productivity. As pointed out by Dean Baker and others, recent data suggest that we are seeing this benefit.
Borrowing is back despite [efforts at] regulation
In addition to benefits from more employment, Fed policy has kept mortgage rates and other borrowing costs low, further boosting the overall economy. At the end of 2017, the average interest rate for a 30-year fixed rate mortgage is slightly less than four percent. For context, this rate, which partially determines how much people pay for a home loan, had not fallen below five percent prior to the great recession. Importantly, unlike in the years immediately following the crisis, consumer access to credit has been growing in recent years, making loans both relatively cheap and more readily available. The often discussed credit freeze seems to thaw from 2014 to 2017.
Mortgages for younger Americans also become more common in recent years. First-time buyers made up only 29 percent of home sales in 2013, according to a June 2017 report from Genworth Mortgage Insurance, well below the 2009 or 2010 level. However, by 2016 new buyers make up 37 percent of sales, the highest share since 1999. I suspect that the average age of new home buyers is older now than it was in 1999, but average years of schooling have also increased over this period, so some delay to home ownership is expected. Commonly-accepted notions of young Americans shunning home ownership by choice (think avocado toast memes) are starting to look as suspicious as the financial sector claims about regulation preventing lending.
Gains from inherited policy can be saved or squandered
Many stories that make sense when describing the lack of economic recovery from 2008 to 2013 fail to fit the recent data. Peak oil, job-stealing robots, aging populations, crippling regulation, and people playing video games, we have been told, consign us to a different growth path. But, as I have discussed, contrary to the prediction of these stories, data covering the years since 2014 show rebounding employment rates, reasonable energy prices and interest rates, and the potential for strong wage and productivity growth. Beyond serving as face value good news, the sustained economic turnaround started in 2014, suggesting that the worker and environmental protection policies in place over the last four years are not too burdensome. As long as people like them, these policies should be maintained; the economy is growing just fine with them in place. If people particularly like some, like health care exchanges, there’s no reason not to improve or expand them.
Despite rapid improvement since 2014, the economy can still add millions of jobs before reaching full employment. This offers room for the current administration to score more policy gains than just the ones it has inherited (little additional growth is expected from its single policy accomplishment, the TCJA). Low-hanging fruit stems from the current interest rate of 2.75 percent on 30-year treasury bonds. Given the low cost of borrowing, the U.S. has little excuse for carrying a long list of unstarted infrastructure projects into 2018. The current administration, with a Republican majority in all three branches of government, is unhindered in its ability to shift more growth levers in the ‘four percent’ direction and push the country closer to full employment, and can do so with federal investments in infrastructure. Doing the opposite, such as by making unpopular cuts to social insurance, would have the effect of slowing the economy. New data and economic theory agree with voters on this one: keep the policies that work and focus on infrastructure.