In Washington, the Federal Reserve could be poised to start winding down its latest round of monetary stimulus as soon as this month. Congress and President Obama appear set for another series of down-to-the-last-second fights over funding the government and raising the nation’s debt limit to ensure the United States does not default on any interest payments.
It also looks increasingly likely that Democrats and Republicans will allow the federal budget cuts known as sequestration to persist for another year, even as the economy is showing more strain from the sequester this year.
“Unfortunately, we seem to be entering another of those periods of elevated risk,” economists at Bank of America Merrill Lynch wrote last week. Researchers at RBC Capital Markets sounded even more bleak. “Just when you thought the U.S. economy was ready to break out of its lackluster 2 percent growth pace that has dominated the recovery,” they wrote, “reality hits.”
More economic turbulence would be particularly tough for poor and middle-class American workers, who are still struggling amid the historically weak growth following the recession. The typical worker’s income has fallen since the recession ended more than four years ago, and the economy, still far from full employment, is creating far more low-paying jobs than good-paying ones. Polls show that workers remain discouraged by the economic picture, with more than half believing the United States is still in recession.
This summer, economic forecasters were becoming more convinced that growth was accelerating and the job market was healing more quickly. Rising stock prices and declining unemployment raised investor expectations that the Fed would deem the economy strong enough to begin tapering its stimulus program, the asset purchases known as quantitative easing, in September.
The new wave of pessimism set in last week. A run of disappointing economic data led forecasters across Wall Street to lower their expectations for fall growth. The Commerce Department reported that personal income fell in July; so did orders for durable goods. Although the housing market continues to improve from its recessionary depths, several key indicators — including new home starts, new home sales and pending sales — have flashed signs of weakness.
Some economists expect U.S. growth to fall short of the Fed’s predictions for the year, and they expect the Federal Open Market Committee to delay tapering until December at the earliest. Such a delay could roil financial markets.
Fiscal policymakers are likely to provoke a much stronger reaction from markets if they defy expectations in their budget negotiations. For now, most investors and forecasters seem to expect a lot of bluster from the White House and Republicans, followed by an eleventh-hour agreement that avoids a government shutdown or debt default. Market indicators show little sign of investors betting on default.
One of economists’ biggest concerns is that U.S. consumers could be pulling back. The Reuters/University of Michigan Consumer Sentiment Index fell last month. IHS Global Insight predicts that annual growth in back-to-school retail sales will slow this year compared with last year.
Rising gas prices would compound the problem by diverting buying power to the pump and away from other sectors. The price of West Texas crude rose to nearly $110 a barrel at the end of last week, its highest level in more than a year. Analysts attribute much of the increase to striking oil production workers in Libya, and they warn that an escalating war in Syria could bring higher prices still.
The reverse was true earlier this year. Prices were relatively low, less than $90 a barrel, which helped to offset the effects of payroll and income tax increases that stemmed from the year-end “fiscal cliff” deal.
Now, the higher cost of fuel is colliding with the grim reality that incomes are not rising very fast for many American workers.
With 11.5 million people looking for work and unable to find a job, there is little incentive for employers to bump up paychecks, especially for lower-skilled workers. Sure enough, Wells Fargo economists reported last week that since the recession ended, job growth has been stronger than normal in low-wage jobs, and those wages are falling.
Jobs in the lowest quintile of wages account for nearly 30 percent of the jobs created since the recession, the economists found. Making matters worse, employees in those jobs are not able to work as many hours as they did three years ago.
“It’s a bit worrisome,” said Sarah Watt, one of the Wells Fargo economists who compiled the report. “The [low] wages are tough enough for those workers to stomach. But then you also look at how they’re not able to work as much as they want.”
The report also highlights a growing disparity between wages in the top-paying jobs, which are increasing, and the falling wages at the bottom. “The average real wage in the highest-paying industry (a subsector of the financial services industry) stands 3.7 times higher than the average real wage in the lowest-paying industry (gasoline stations),” the report says. “At the same point during the last employment recovery, the dispersion in real wages between the highest-paying and the lowest-paying industry was 3.2 times.”
The Commerce Department’s latest income data suggest it’s not just gas station attendants or fast-food workers who are feeling the wage pinch. It’s also government workers. Government wages have fallen 5 percent since January, a drop the department attributes to pay cuts and furloughs driven by sequestration.