US Economy: Under Unprecedented Pressure--But Still Kicking Ass

The US economy has suffered several major blows in the past five years. Hurricanes, wars, terrorist attacks, high petroleum prices--but you would never know there was a problem from looking at unemployment figures or job creation. What does it take to put this economy down for the count? The Futurist blog has taken a look at this question, and makes a few speculative guesses.

Over the last 3 years, the US has averaged 3.5% annual GDP growth, which is exactly at the long-term trendline. The unemployment rate is lower than it has been for 35 of the last 38 years, with seven million jobs being created in the last 3 years. What is remarkable is that in this period, a number of factors that have caused recessions in the past have occurred, even as new negative forces have simultaneously emerged, and all these have not derailed economic growth. But does this mean we could be growing even faster, had these problems not emerged? Let us look at all the bullets that did not manage to do the damage that they once did, and the new bullets that we have successfully endured.

1) Terrorism and War : Depending on how one measures it, the Sept. 11, 2001 terrorist attacks cost the US economy anywhere from $200 to $800 billion. In addition, it worsened the recession on 2001-02, and still slows the productivity of the US economy through longer lines at airports, increased security expenditures, difficulties that law-abiding foreign tourists face in getting visas to enter the US (costing us over $100 billion a year in tourist revenue from those who opt to vacation elsewhere), etc. This is effectively a new tax that we will be paying in perpetuity.

While the War on Terror has still cost the US just 3000 troops in 5 years (vs. 50,000+ in VietNam and Korea), the media coverage and resultant burden on the psyche of the US consumer today may comparable to what it was during the VietNam War. Add to that the threat that Americans could be killed in the US mainland when they least suspect it. This lingering fear makes consumer confidence lower than it should be.

2) Oil Spike : When oil reached $90 in today's dollars back in 1980, this caused a very deep recession, even though prices quickly dropped after that. In 2006, oil reached $78 per barrel before dropping, without causing a recession. In fact, it appears that sustained prices near $60/barrel are not sufficient to cause a significant drag on the US economy. This is partly because of the US economy evolving to a state where a large portion of output is based on innovation and technological advancement, which are much less tied to oil prices. An oil spike hurts GM and American Airlines much more so than it hurts Google and Microsoft.

Read : $70+/barrel oil, the non-crisis.

3) Massive Natural Disaster : Hurricane Katrina was the largest natural disaster the US has been struck with in several decades, with the direct economic costs of a major city being submerged with water compounded by the displacement of hundreds of thousands of people and the economic activity they generate. It cut the GDP growth of Q305 down to 1.8%. But in the next quarter, GDP bounced back smartly to 5.6%. The US economy adapted to the shock in a very short time.

4) Corporate Scandal Tax : While scandals like Enron and Worldcom could happen in any era, the resultant Sarbanes-Oxley (SOX) legistation has proven to so oppressive to law-abiding corporations that the economic cost exceeds the implosion of Enron and Worldcom by a large margin. Medium-sized public companies have to pay an estimated $3 million per year to comply with SOX, which is money that could otherwise go towards R&D, or passed onto shareholders. Estimates on the total opportunity cost of SOX over the last 3 years run as high as $1 trillion. Hopefully SOX can be scaled back for medium-sized enterprises with under $1 billion in annual revenue.

5) Trade Deficit : The US trade deficit, or the amount by which imports exceed exports, is not entirely a negative economic force, but it currently is over 5% of GDP, vs. just 2% of GDP in the mind-1990s. This reduces the total US GDP growth rate by over 1% a year.

....So in conclusion, the US economy is performing very well relative to historical norms, and this is even more remarkable given the many blows it has taken in recent years.

Source.

Then he looks at the world economic growth rate, and expresses disappointment that the US growth rate lags behind that of the developing world. Of course, if something is as large as the US economy, it takes a lot more growth to create an impressive per centage growth rate, compared to the many midget economies of the developing world--where minimal growth translates into large percentage growth rates.

All I ask from people who compare numbers is that they think first about how those numbers are derived.