The state of the current American Recovery seems to show that Obama’s presidency was not a failure, contrarily to what the results of the recent mid-term elections suggested. The Democratic party used Thanksgiving Day to newly highlight president Obama’s successes and they did so by presenting on their website the so-called Official 2014 Thanksgiving Cheat Sheet. This brief and funny document contains some suggestions for Democratic voters to contrast Tea Party relatives starting an argument during the Thanksgiving lunch. The title of the document is This is what a successful presidency looks like and it describes how well President Obama’s economic policies performed, supporting the argument showing appropriate macroeconomic data for the U.S. in the period 2008-2014.
During Obama’s presidency, unemployment fell from 7.8% to the prerecession rate of 5.8%. GDP growth rate was about -5.4% when Barack Obama took office, now it is +3.5%. Deficit/GDP ratio decreased dramatically from 9.8% of 2008 to 2.8%. Finally, consumers’ confidence index increased from 37.7 to 94.5 in six years. Wall Street indexes are at their historical maxima, Obamacare has started to be effective and the immigration system will soon be fixed. However, this data may not tell the whole story and American recovery process could be far from being stable and reassuring.
Real output growth, calculated from the third quarter of 2013 to the third quarter of 2014, is 2.4%. This is still a good performance, but less astonishing than the +3.5% on annual basis registered by the Democrats. The discrepancy between the two figures is explained by a disappointing first quarter of 2014, in which the economy shrank at a 2.1% on annual basis. In addition, growth of average weekly earnings and prices has been moderate in the last year, respectively +2.8% and +1.5%, below the Fed target rate. For what concerns the labor market, it is true that unemployment significantly decreased, but still the underemployment rate is high. This rate refers to those people who are employed, but would like to work more hours than they actually do.
What data, analyzed in their complexity, could suggest is not easy to discern.
Different Hypothesis To Explain the Recovery
1/ One hypothesis could be that recent figures about GDP growth rate depict an excessively positive situation for American economy, driven by the poor performance of the beginning of 2014. If this is the case, what we could expect is a progressive reduction in the growth pace of the economy driven by higher wages and inflation.
2/ A second hypothesis is that we casually find ourselves in a period of boom driven by low inflation. In particular, knowing that the U.S. economy is quite closed, we could imagine that a period of weak inflation (low costs of oil and other commodities) could encourage household expenditure and firms’ production, regardless of the state of economic fundamentals.
3/ The third hypothesis we could draw focuses on the role played by the Fed. In fact, it is likely that the Fed has found a way to make the economy grow (that is through the assets prices channel), but this does not mean that it is able to control the dynamics of this growth. If uncontrolled, increases in assets prices lead to a new period of financial instability, which we cannot do anything about except hoping that it will be harmless.
It is likely that the three states of the world coexist in determining the current state of American economy. The monetary policy decisions the Fed will make in the next periods will tell us which of the these three states of the world is considered the most dangerous by monetary policy authorities. The risk of instability is still there and the Fed should put all of its effort to avoid a new collapse of the whole financial system. There seems to be a trade-off between growth and stability, which is really hard to tackle. Barack Obama was successful in giving the American economy the right fiscal stimulus in hard times and the data provided by the Democrats are there to suggest it. Now, it is time for stability and this is the challenge that the Fed and the White House have to face for the near future. Hopefully, as President Obama puts it, the best is yet to come.