Economists are shrugging off Thursday's news that the U.S. economy contracted over the first three months of the year. They're saying it's a frigid winter weather blip that already shows signs of melting away with spring. While that may be true, other indicators suggest that the promised summer recovery won't be as robust as hoped.
The Commerce Department's announcement that the nation's GDP shrank by 1 percent in the first quarter of 2014 was surprising mostly because contractions rarely happen outside of a recession. Few if any analysts think there's any chance we're entering a recession, generally defined as the GDP contracting for at least two consecutive quarters.
Among their reasons: Home prices continue to rise, and unemployment continues to drop. Unfortunately, neither of those facts looks as good when examined closely. Plus, scant wage growth and ever-heavier student loan debt makes that ambivalent jobs picture look a lot uglier.
A tale of two real estate markets
While the overall price of homes has increased, the numbers of homes being sold has decreased. The price rise stems from a schism in the real estate market: Sales of the priciest 1 percent of homes continue to increase, even as they fall for the other 99 percent.
A report released Tuesday by real estate research firm Redfin found that sales of the most expensive homes were up 21.1 percent through April of this year, while they've fallen 7.6 percent for the rest of the market. That follows a gain of 35.7 percent in 2013 for the top 1 percent and just 10.1 percent for less expensive homes. In 2012, sales increased by 17.5 percent and 2.9 percent, respectively.
The report noted: "While home sales have shown meager to modest gains in the non-luxury portion of the market in Oakland (up 2.2 percent over last year), Miami (up 1 percent), Raleigh-Durham (up 1.2 percent) and Atlanta (up 4.8 percent), other markets including Phoenix (down 15.7 percent) and Minneapolis (down 12.5 percent) display a strange (and perhaps troubling) dichotomy: For the top 1 percent, the housing market is still booming. But for the rest of the market, the recovery is running out of gas. As home prices have risen, wage and job growth have failed to keep up."
This is in line with a report released Thursday by FreddieMac, which found most of the nation's housing markets are stalling. The "Multi-Indicator Market Index" (MiMi) looks at data from a range of sources to determine the condition of the single-family housing market. It found only 10 states and the District of Columbia are in the "stable" range along with four of 50 metro areas included in the index: San Antonio, New Orleans, Austin and Houston.
"Less than half of the housing markets MiMi covers are showing an improving trend, whereas at this time last year more than 90 percent of these same markets were headed in the right direction," Frank Nothaft, Freddie's chief economist, said in a statement. "We're hopeful that many of these markets that have stalled will start moving again now that mortgage rates have eased over the past month and the spring home buying season is upon us."
More jobs, but not great ones
The decline in the unemployment rate is also problematic because of the types of jobs that have been created since the recession ended.
"It's what we typically think of as middle-skilled workers -- for example, construction workers, machine operators and administrative support personnel -- that are hardest hit during recessions," William C. Dudley, president of the New York Federal Reserve said in a speech last week. "Further, a feature of the Great Recession and indeed the prior two recessions is that the middle-skill jobs that were lost don't all come back during the recoveries that follow. Instead, job opportunities have tended to shift toward higher- and lower-skilled workers."
Middle-skilled workers frequently have to take lower-paying, lower-skilled jobs when their jobs disappear. According to the Bureau of Labor Statistics, the economy added 288,000 jobs in April. Of these, 24,000 came from temporary business help services, 35,000 were retail jobs, 40,000 were education and health services and 15,000 were in what is called "other services." The report noted that within this sector, "employment in personal and laundry services continued to trend up; this industry has added 32,000 jobs over the past 12 months."
Stagnant wages and groaning student loan debt
The BLS report also said average wages were up 1.9 percent in April. However, significant gains by top earners frequently distort wage increase figures. Longer-term surveys continue to find wages have been stagnant for decades for those not in the top ranks of earners.
While wages have stayed flat, the college degree needed to get a better-paying job has become more expensive. As a result, more workers are carrying more student debt than ever before: Between 2005 and 2012 student loans more than doubled in real terms.
That growth results from an increase in the total number of borrowers and the average balance per borrower. These two figures increased because strained family finances and weak labor markets may have pushed larger numbers of people to attend graduate and professional schools, which have significantly higher tuitions than undergraduate programs.
A report out this month from the St. Louis Federal Reserve noted: "Although households deleveraged other forms of debt during the Great Recession, they accumulated so much student loan debt that it now outranks any nonmortgage debt, including auto loans and credit card debt. As of March 2012, the stock of outstanding student loan debt stood at about $870 billion, surpassing total credit card debt ($693 billion) and total auto loan debt ($730 billion)."
The report also found the distribution of student loans by debt levels had shifted, with an increase in the share of borrowers with loan balances in excess of $10,000. Increases were greater at higher levels of debt:
- Only 3 percent of borrowers in 2005 owed more than $100,000. By 2012, that fraction reached 6.2 percent.
- The share of borrowers who owed between $150,000 and $175,000 rose from 1.7 percent to 3.7 percent.
- The share who owed between $175,000 and $200,000 went up from 0.6 percent to 1.5 percent.
- The share of those owing more than $200,000 went up from 0.2 percent to 0.6 percent.
Many economists expect increased consumer activity will spur the U.S. economy out of the "nonrecovery recovery." But with most Americans saddled with increased debt, reduced home equity and no increase in earnings, it's difficult to see why they would be willing to spend significantly more.
And as far as that second-quarter economic rebound goes -- it's going to have to be a substantial one. On Tuesday -- before the revised GDP numbers were released -- economist Michael Pento wrote in his blog about how large a rebound the economy will need in order to achieve even a tepid growth level this year.
"After posting annual GDP growth of just 1.9 percent for all of 2013, which was much lower than the 2.8 percent growth experienced during 2012, this year started off with annualized GDP growth of only 0.1 percent for the first quarter," he wrote. "This means GDP growth for the second quarter has to be near 5 percent just to produce the same 2.5 percent growth pace experienced back in 2010."