The U.S. economy has “largely recovered” from the financial crisis, and the unemployment rate is down to 5%, admits economist Barry Bosworth of the Brookings Institute. Yet median household income is stuck at “well-below pre-recession levels,” he points out in a recent opinion piece, with more than half of Americans saying they continue to fall behind financially.
According to Bosworth, the sentiment of many middle-class and other Americans is supported by research he published this month. “A more detailed examination of the data suggests that the reported economic recovery has been in part an illusion, because it reflects a contraction of aggregate supply rather than a strong expansion of demand,” he explained an opinion piece.
Labor, Productivity Woes
The conundrum is tied to a continuing decline in the labor force participation rate and very modest gains in productivity, Bosworth finds, after comparing actual GDP with estimates of potential GDP. As the “sluggish recovery dragged on,” he points out, the Congressional Budget Office trimmed its estimates of potential GDP growth to the 2014 projections.
Weak GDP growth needs to be viewed critically in relationship to expected and real GDP growth since 2007, Bosworth argues. Furthermore, what’s viewed as the current reported recovery “is due to the sharply lower current estimate of potential,” the economist says.
In other words, the bar is being lowered for GDP growth, so the economy: (1) appears to be performing better than is actually the case; and (2) is not producing the strength needed to boost median household income.
“Even the revised estimate of potential GDP appears too high, and the CBO is likely to lower it further in the next budget cycle,” Bosworth said.
Though the gap between actual and potential GDP is still reported at 4%, the unemployment rate is below the rate the CBO associates with full employment. While these two figures do not have to be “in complete agreement,” the difference between these two figures “seems unduly large” today, he argues.
The continuing decline in labor force participation rate has surprised economists, according to the Brookings fellow.