The fact that the US economy is in recovery, even modestly, is something of a miracle given the number of factors working against it. This is absolutely unique in American economic history: a recovery without the housing market expanding substantially; a recovery with state and local government employment shrinking for three years in a row; and a recovery with households owing, on average, well over 100 percent of their after-tax income in debt.
Yet even with all three of these factors dogging us, we have avoided slipping back into recession.
That’s not all. Exports, which are a key element contributing to strong growth and have offered a boost to many recoveries over the years, continue battling the headwinds of the European crises, slowing growth in China and India, and a strengthening dollar – which makes US exports more expensive in world markets. Moreover, oil prices swung widely during the past three years, the result of dramatic international events such as the Arab Spring.
The remarkable thing about the current recovery is not how slow it is, but that it exists at all. There was a good chance that the economy would shrink in this environment, but it didn’t. The US economy in the second quarter of this year was $847.5 billion (in 2005 dollars) larger than in June 2009 on an annualized basis. That's the equivalent of an average annualized growth rate of 2.2 percent over inflation during those three years. That is not stellar, but it is a far cry from a recession.
Much of this resilient recovery can be traced to some smart choices made by President Obama and Congress. They focused on investments that helped manufacturing and commercial construction. They provided help to struggling states and localities. And they enacted middle class tax cuts that boosted consumption. The recipe for gaining further momentum is more of the same.
These federal policies worked by strengthening the private sector, where possible: This meant attention to the struggling manufacturing sector through the Recovery and Reinvestment Act of 2009. It meant infrastructure investments and help for the auto industry. And it meant strengthening household after-tax income to reduce families’ debt burdens through increased unemployment insurance benefits, tax credits for working Americans, increased Social Security benefits, and a payroll-tax holiday – all measures targeted toward boosting middle-class incomes.
The results are in the numbers. Manufacturing production expanded by an annualized growth rate of 5.6 percent from June 2009 to June 2012, recovering many of the losses before the Great Recession started in December 2007.
Construction spending by federal, state, and local governments on highways, schools, railroads, hospitals, and other projects expanded by an annual inflation-adjusted rate of 3 percent over the same time period, thus offsetting the declines in private-sector construction spending.
And after-tax income grew by an annual inflation-adjusted rate of 1.2 percent from June 2009 to June 2012, helping to reduce the household debt burden.
Stronger production, more infrastructure spending, and higher incomes had other intended results. Employment started to grow in February 2010, and now there are now more than 3 million more jobs than in June 2009. The unemployment rate started to drop, falling below 8 percent for the first time in almost four years. And the manufacturing resurgence went along with increased US competitiveness, reflected in an average annual export growth rate of about 8 percent over three years. The economy has performed like a car with the parking brake still pulled. The surprising thing is not that the economy hasn’t grown faster, but that it hasn’t gone into another recession.
That is not to say that we shouldn’t expect the economy to perform better, to grow faster, and to add more jobs each month than it has. Quite the contrary, one lesson is that policymakers can help the economy by removing obstacles to faster growth, such as helping struggling states retain teachers.
The second lesson is that policymakers have already shown that they know how to remove such obstacles. Past policy interventions, starting with the recovery act in 2009 and a series of smaller infrastructure measures and middle-class tax cuts, not only prevented another Great Depression in 2009, they also kept the economy away from another recession in the subsequent years. The resilient recovery of the past three years reflects the inherent success of such targeted policies.