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As 2014 draws to a close, one of the biggest news stories is the growing American economy. While the U.S. economy officially exited from the Great Recession in June 2009, Americans have remained pessimistic. They worry about whether the economy will continue to be robust for future generations, how there are still a large number of part-time workers that wish they could work full-time, and the impact of globalization and immigration on job growth. Last week, the Commerce Department revised its third quarter numbers for America’s gross domestic product (GDP). It found that the economy grew by 5% between July and September, which is the largest quarter of economic growth that the country has experienced since 2003. A rise in exports, falling oil prices, and enhanced consumer spending accounted for the figure and economists are optimistic that America’s economy is heading toward a period of sustainable growth. Since extempers will face questions about the U.S. economy several times at various tournaments in the second semester, Extemp Central thought it was proper to provide a topic brief breaking down America’s economic performance in 2014 and assess its prospects for 2015.
This topic brief will discuss America’s economic growth in 2014, analyze its prospects for 2015, and provide a brief discussion of how an improved economy could affect the country’s political climate for the next two years. In each section, this brief will provide advice on how to tackle questions about the U.S. economy.
Readers are also encouraged to use the links below and in the related R&D to bolster their files about this topic.
The U.S. Economy in 2014
Before going into a discussion of how the United States economy performed in 2014, it is important to clarify what gross domestic product (GDP) is so that extempers know how they can explain it to judges in a round. GDP, as defined by the Organization for Economic Cooperation and Development (OECD), is “an aggregate measure of production equal to the sum of the gross values added of all resident institutional units engaged in production (plus and taxes and minus any subsidies, on products not included in the value of their outputs.” That is clearly not a definition that you want to include in a round, but in layman’s terms, GDP is a way to measure economic performance by taking into account consumer, business, and governmental activity, as well as trade. The formula for calculating GDP is C+I+G+X-M. The C represents consumer spending, the I represents business investment, G represents government spending and investment, X represents exports, and M represents imports. Imports are subtracted because they have to be paid for out of the economic activity of the other areas. Economists assemble data for each area and create a sum from this calculation and then compare it to the previous economic quarter – an economic quarter lasts three months – and the difference between the two is expressed as a percentage. For example, when the Commerce Department says that the U.S. economy’s GDP grew by 5% in the third quarter (which runs from July to September), they mean that growth in the third quarter was 5% higher than the second quarter of the year (which runs from April to June). For the United States, as well as most economies in the developing world, consumer spending is the most important part of GDP. In fact, consumer spending according to most economic estimates is 66-70% of America’s GDP. So, if consumers are not spending or engaged in economic activity, GDP estimates will be lower.
I should also caution extempers about using the data that will appear in this brief. You want to make sure in a speech about economic issues that you use data, but make sure not to throw out numbers without adequately explaining to your judge what they mean. Make sure to impact them. In other words, do not simply throw out the current unemployment number to your judge and compare it with the unemployment number of the previous year and then move on. Instead, you need to make sure that you tell the judge what a certain unemployment number represents. Why is that unemployment number good or bad? What does an unemployment number tell us about the health of the economy in general? Similarly, when discussing GDP, do not just throw out the growth rate. Tell the judge how that growth rate was calculated and why it is a good or bad figure. Economics is a crazy social science, full of nuances and disagreements. It can overwhelming for high schoolers to navigate – after all, how many extempers really understand the nuances of the bond market that The Economist loves to talk about in its finance section each week – and can be even more difficult for your judges, not all of whom have an interest in economics and shudder in fear at the mere mention of it. Approach each of your economic rounds as if you are educating the judge about the issue because if you can provide a compelling, yet educational narrative about an economic topic I can guarantee you that you will receive higher ranks than your other competitors, who are probably going to fall into the “spewing numbers” trap. A final quick tip is that you always want to make sure to cite your sources when bringing up a number. This is why some economic speeches will require more sources than others, but you cannot assert that unemployment is a certain number or that an interest rate is at a certain level without a source to support you. Otherwise, it appears to your audience as if you are making the number up.
Bloomberg explains on December 23 that the Commerce Department revised the third quarter numbers for the U.S. economy, saying that instead of growing 3.9% in the third quarter, the economy actually grew 5%. This is the best quarterly GDP number since 2003. The reason for the revised figure was that housing purchases, which make up a large portion of the consumer spending part of GDP, rose 3.2% over the second quarter as opposed to the initial finding of 2.2%. Also, there was more spending in healthcare, recreation, and financial sectors than economists within the Commerce Department previously believed. Time adds on December 23 that other factors explain the rise of GDP in the third quarter as well. For example, state, federal, and local governments have increased their spending and many are exiting a period of fiscal austerity imposed by the Great Recession. The Washington Post explains on December 23 that state and local expenditures increased by 1.1% over the previous year, which followed a 3.4% expansion in state and local government spending in the second quarter. Federal government spending grew by 9.9% in the third quarter as well, fueled in part by higher defense spending. In addition, American exports grew in the third quarter, while imports declined. The Bloomberg article previously cited also mentions that business investment is increasing within the economy, as businesses are enhancing their spending on construction, equipment, intellectual property, and research and development. In other words, there is a perfect storm taking place within the economy as consumer spending is growing, business investment is taking off, governments are entering the economy by channeling some much needed funds toward infrastructure, and exports are rising relative to imports. All of those factors working together will raise the C, I, G, and X variables in the GDP calculation and produce a higher GDP figure.
2014 has been a somewhat rocky road for the economy although it is ending on a strong note. CNN writes on December 23 that the economy actually contracted in the first quarter of the year, with GDP growth registering -2.1%. A recession is defined by economists as two consecutive quarters of falling economic growth, so there were some fears in the early part of the year that the U.S. economic recovery, which had been steadily ongoing since the summer of 2009, was stalling out. Throughout 2013, the U.S. economy had grown at a steady quarterly pace: 2.7% in the first quarter, 1.8% in the second quarter, 4.5% in the third quarter, and 3.5% in the fourth quarter. The economy did recover in the second quarter of 2014, allaying fears of a new recession, as GDP climbed to 4.6% and now we have a 5% growth figure for the third quarter. So why did the economy contract in the first quarter of 2014? The answer is likely due to the harsh winter that various parts of the country experienced between January and March. Remember the colder than usual temperatures that hit the nation due to the polar vortex? Well, that likely had a negative effect on economic activity as consumers stayed home instead of venturing out to spend, inhibited construction projects and thereby hurt that sector, and caused consumers to direct more of their spending toward higher heating bills. With the weather being much better in remaining quarters, the economy returned to its regular signs of growth.
As far as unemployment in concerned, those numbers have also fallen. Extempers should always remember that the Bureau of Labor Statistics (BLS) only counts those people who are actively seeking work as unemployed. It does not count those who were once looking for a job, still do not have one, and have “given up” looking for work. Arguments against the current unemployment number say that there are more Americans without work than the unemployment rate indicates because these “discouraged workers” are not factored in. Nevertheless, unemployment has shown a steady decline throughout 2014. The Brookings Institution, in a piece about the Federal Reserve on December 22, explains that the unemployment rate stood at 6.7% at the end of 2013 and the unemployment rate is now 5.8%. The Federal Reserve, which sets the nation’s monetary policy (interest rates), would like to see an unemployment rate as close to 5% as possible. Brookings says that if discouraged workers and those seeking full-time work that are currently engaged in part-time labor were taken into consideration, unemployment would really be 11.4%, but even this would be lower than 13.1%, which is what that rate was at the end of 2013 (As a side note, Brookings has various pieces assessing the health of the economy and extempers should read and file all of them). Reuters notes on December 18 that the number of Americans filing new claims for unemployment benefits are also falling, with 6,000 fewer workers than expected seeking benefits in mid-December. In addition, job growth has exceeded 200,000 for ten straight months now, when is the longest stretch since 1994. Also, The Christian Science Monitor reports on December 24 that in the first eleven months of 2014, employers have collectively added 2,650,000 jobs to the economy, making it the best year for hiring since 1999. The number of people seeking jobless benefits is also at a historic low for fourteen of the last fifteen weeks, which may signal, according to The Christian Science Monitor, that companies are no longer laying off workers and that they are retaining them in the expectation that orders will continue to improve.
So, how will the economy do for the entirety of 2014? The Washington Post article previously cited explains that PNC forecasts that GDP growth will end up at 2.3% for the entirety of 2014. The Commerce Department projects a higher figure of 2.5%. Much of this will be based on what the fourth quarter GDP numbers look like, but chances are that they are going to be good. First, news of a higher performing third quarter is creating a boom in the stock market, with the Dow Industrial Average climbing surpassing 18,000 for the first time. The Dow Jones is a stock index that shows how thirty of the largest firms on the New York Stock Exchange (NYSE) are doing and is thereby a good barometer of investor activity. Second, lower gas prices are freeing up more money for consumers to spend elsewhere. As stated in our recent topic brief on falling global oil prices, falling gas prices will save the average American household more than $550 over the next year, which basically serves as a new $1 trillion stimulus package courtesy of the private market. CNN reports on December 17 that Federal Reserve Chairwoman Janet Yellen has said that the lower prices will also help the economy because America is a net importer of oil, so cheaper prices mean that its import costs will be lower and the drag on economic activity will be less. Third, there are signs that American consumers have succeeded in writing down some of their bad debts from the Great Recession and are now more willing to spend. Whereas previous income was directed toward solving mortgage problems or paying down other loan debt, the elimination of these debts and their anxieties will channel money into new economic ventures. Evidence of this can be found in the Christmas shopping season, as Time explains that American shoppers spent a record $42 billion in the final weekend before Christmas. And also, economic confidence among consumers is growing. CNN on December 23 explains that more than 50% of Americans think the economy is now in good shape, which is a drastic improvement over October’s numbers that showed that only 38% of the Americans thought that the economy was doing well. This may reflect the less polarized political environment that follows a midterm or presidential election since conservatives and other Republicans may have been unwilling to say that the economy was doing well since that may help the chances of the other party. However, improved confidence in the economy is a sign that Americans may be willing to take more risks in business and investing and/or spend more freely.
2015 Economic Forecasts
Economists have conflicting attitudes about what the U.S. economy has in store for it in 2015. Some economists foresee more robust growth, which may help America reassert itself on the global stage more forcefully than previous years, while others say that there are still some structural weaknesses in the economy that must be addressed by policymakers. This section will breakdown both views because extempers will probably have to assess the health of the economy at various points during the second half of the season.
Those who argue that the economy will continue its healthy growth in 2015 point to some of the factors already stated above. First, they note that lower oil prices will probably continue throughout 2015, with global economists speculating that the price of oil will not top more than $80 a barrel by December of next year. Second, American job growth is steadily increasing. The Washington Post article previously cited from December 23 explains that the U.S. economy is finding the right cycle of workers that are entering good paying jobs, which will boost consumer spending and help the economy as a whole. Politico mentions on December 23 that if America’s GDP grows near 3% for the year that would be a sign of a dynamic economy, as the economy has averaged mediocre growth of 2.2% annually since the end of the Great Recession. The last time that the economy averaged more than 3% of annual growth, according to Politico, was 2005, when the U.S. economy grew by 3.3%. Third, the housing market will continue to improve. Problems in the housing market generated the 2008 financial crisis as subprime loans – loans given to those who were at a high risk of defaulting on them – were speculated in by financial institutions. An article from the Brookings Institution on the housing market, published on December 22, explains that 2015 should see stronger growth in home construction and sales because inventories of houses on the market are low (necessitating the construction of new units), the labor market is improving (thereby freeing up more income for people to create new “home starts” which are defined as the beginning of the construction of a new home), low mortgage rates, and an easing of mortgage standards by Government Sponsored Enterprises (GSEs) such as Fannie Mae and Freddie Mac, as well as the Federal Housing Authority (FHA) and the Department of Veterans Affairs.
However, those who argue against improved economic performance have a variety of arguments that they can use to counter the optimists. In terms of the third quarter GDP number, some economists do not see it lasting and signaling a period of robust growth for the rest of the economy. The Bloomberg article cited at the beginning of this brief admits that some of the factors that generated the high number will be short-term. For example, the economies of Europe, Japan, and China are slowing down, with Europe facing deflation, Japan recently entering recession, and China intentionally reducing its GDP as it moves to a consumer-driven economic model. This will probably reduce some of the demand for American exports, thereby reducing the “X” variable in the GDP calculation. The Brookings Institution article on the Federal Reserve also notes that as developing economies such as Brazil slow down and as the Russian rouble has experienced a slump as a result of falling global oil prices, more investors are likely to park their money in the United States. This will have the effect of raising the value of the American dollar relative to other currencies, which means that it will make American exports more expensive in overseas markets. That will also constrain exports. Furthermore, as the American economy grows and employment gets better, consumers will spend more, but most of the products they buy will probably be imported from other nations. This will raise the “M” variable of GDP, which subtracts from the other four positive variables. In a sense, the trade deficit will rise in the coming year, thereby serving as a drag on GDP growth more than anything. Also, the CNN article previously cited from December 23 mentions that businesses might be curtailing some of their investment in the economy as orders of durable goods – those goods that are supposed to last for three years or more – have declined.
Economists also remain skeptical about how well the benefits of the new economic recovery are trickling down to the lower and middle classes. President Barack Obama and the Democratic Party have spent much of the last few years talking about the problem of income inequality and economists are now trying to see how much of a problem that is for the United States and other countries. The New York Times on December 17 reports that the Pew Research Center has found that income inequality is at one of its worst levels in the past thirty years. It explains that the median net worth of upper-income families reached $639,400 in 2013, which was seven times that of the middle class and seventy times more than lower income families. Part of this disparity is due to the wealthy owning more physical assets such as cars, homes, and stocks that can better weather financial crises. It has also been said that the boom in the stock market has not trickled down to all Americans, as those who own these assets tend to be wealthier or in more secure jobs that provide 401k retirement benefits. The Christian Science Monitor explains on December 23 that Americans might tell pollsters that they are becoming more optimistic about the economy, but a majority of Americans still express worry that younger generations will have to endure a lower standard of living relative to their parents. Gallup’s index of economic confidence also shows more negative attitudes about the economy than positive ones. Again, this may be partly due to jobs. As the Brookings Institution explains in a piece about employment on December 22, millions of Americans are working shorter hours than they would like and 41% of hourly workers between the ages of twenty-six and thirty-two only learn of what hours they will work a week in advance, thereby making it hard for those who are trying to work multiple jobs to make ends meet. Also, the minimum wage is more than 10% below what it should be in equivalent terms, but a Republican Congress is unlikely to raise it past its current rate of $7.25 an hour. In the midterm elections, four states – Alaska, Nebraska, South Dakota, and Arkansas – saw voters elect to raise their state’s minimum wage and Seattle has moved to raise its minimum wage to the $15 an hour mark supported by labor unions. This shows that more activism about the minimum wage may play out on the state rather than federal level, but workers do have anxieties about how well their wages are keeping up relative to inflation. Some pessimism in the labor market may also be due to some gender imbalances, as the number of “good” jobs for women are improving, while the number of “good” jobs for men are declining. This is directly tied to education attainment as the number of women going to college after high school graduation has risen to 71% from 63% in 1994, while the number of men seeking a college degree has remained stagnant relative to 1994 levels at 61%.
There is also a fear that the U.S. economy has become too consolidated and dominated by top tier firms and that the country is facing a lack of start-up firms that are needed to rejuvenate and power the economy into the next century. The Washington Post argues on December 17 that there is a shrinking share of Americans that are willing to take risks and launch new business ventures, partly due to the regulation encouraged by big businesses, who have fostered strong political connections in recent decades. Economists are not sure why the number of start-ups in the United States has fallen since the 1980s, but the evidence clearly shows that something is wrong. For example, the “start-up rate,” which measures how many new companies are operating relative to all other companies, has declined by 12% since the 1980s. These start-ups are important because, as a Brookings Institution piece on start-ups explains on December 22, they typically provide new outlets of economic activity. For example, business conglomerates did not develop the telephone, computer, cars, or airplanes. The fix for this might be encouraging more immigration of highly-skilled workers from other countries, something that President Obama’s executive action on immigration largely ignored, or a reform of the country’s regulatory laws and clamping down on business consolidation. Either way, the economy is in a desperate need of new ideas and there are fears that without a revival of start-up firms that the U.S. economy will languish.
Another criticism of America’s current recovery is that there are still some structural weaknesses that policymakers have yet to address. The Atlantic on December 26 points out that lower oil prices may be good for consumers, but they could result in a wave of bankruptcies in the domestic oil industry as many of these firms are over leveraged with debt and cannot endure low prices. Extempers should check out our topic brief on falling global oil prices for a scenario where a wave of defaults in the oil sector spread through the rest of the financial industry. In addition, economists are critical of the debt that American consumers still face. The Atlantic points out that American consumers still bear a debt load that totals $3.2 trillion, with more than 33% of that debt in the form of student loans ($1.2 trillion). The rising cost of college and the public pressure for more students to attend is becoming a problem for many younger Americans, some of whom do not have jobs to currently pay off their loans. These loans also have a high default rate of 14%, but bankruptcy cannot wipe out one’s student loan debt, so some experts are wondering what kind of drag student loan debt may one day have on the economy. Finally, there is a problem with the subprime loan market, which is returning. Lax borrowing standards in the housing market played a role in fueling that bubble in 2005 and 2006 and now that bubble could return if lending standards are relaxed again, which federal authorities show signs of doing. The recent $1.1 trillion budget deal in Congress also allows banks to play with securities once again and this could trigger another financial collapse if banks speculate poorly, which they have a tendency to do. Just as it took the housing market years to collapse, extempers should pay attention to trends in the subprime auto loan and housing markets, as well as what is taking place with student loan debt. All three could one day wreck what appears to be a current economy recovery or mire America into anemic growth rates that are not worth the paper they are published on.
The biggest wild card on the horizon for 2015 will be what the Federal Reserve does about interest rates. Since the 2008 financial crisis the Federal Reserve has kept interest rates near zero in an attempt to encourage more lending and risk taking in the economy. The Federal Reserve also pursued a quantitative easing (QE) policy of printing money and buying $4.5 trillion worth of bonds to inject liquidity into the economy. This policy was brought to an end in October, but the Federal Reserve has yet to act to raise interest rates. The impetus for doing so would be to prevent a healthy economy from taking off too quickly and producing inflation in excess of the Federal Reserve’s goal of 2%. The danger of raising interest rates too soon is that it may suddenly cause a cessation of business activity as consumers may opt to keep their money in savings rather than spend it and/or businesses will put off expansion because it becomes more costly to take out loans. The Brookings Institution article on the Federal Reserve that has been previously cited explains that at its December meeting, fifteen of the seventeen members of the Federal Open Market Committee (FOMC) suggested that interest rates be raised in the near future. Most do not expect a rate hike until mid-April or May and the stock market was happy to hear news that rates would not be raised immediately. However, a rate hike is likely coming in 2015. The only question is when it will take place and the best way for extempers to make a case of when that rate will rise is when they think that inflation in the economy may begin surpassing 2% and when unemployment begins to mirror the Fed’s target of 5.2-5.5%. The unemployment number is getting there, but the Fed currently shows that inflation is averaging 1.3%, which is down from 1.6%. Also, the Federal Reserve will keep monitoring what is happening with global oil prices, which have depressed some of the inflation that the country is experiencing because of how oil prices are tied into transportation costs, food costs, and other economic activities, and how the global economy is doing, as depressed activity elsewhere could become a drag on American exports. Thus, the Fed has to be cautious about when it raises rates, as it does not want to act too quickly and destroy economic growth, but it does not want to act too slowly either and see inflation spiral out of control and bubbles form in the economy.
The Political Impact of the Current Economy
The economy is the one issue that typically trumps others in national, and even state and local elections. People are directly concerned about their jobs and what possibilities the economy has for their children and grandchildren. They are also very active and vocal when it comes to how the government will set tax policy and who it will choose to tax and at what rate. The 2008 financial crisis made it easy for then-Senator Obama to defeat Senator John McCain in that year’s presidential contest, but also made it difficult for him in his first several years to create policies to get the economy going again. Policies such as “cash for clunkers,” a large stimulus package, and the auto bailout had some mixed results, but signs that the economy was improving likely helped President Obama defeat Mitt Romney in 2012. In some presidential contests a good economy does not always lead to victory. For example, Vice President Al Gore was not able to capitalize on the great years of the Clinton administration and win the Electoral College in 2000, although he came within 537 votes of doing so. Also, in 2004 President George W. Bush was able to make security policy and social issues such as gay marriage more important topics than the state of the economy, which was performing below expectations. Nevertheless, one can still make a safe bet when it comes to the nation’s economic fortunes and the party that will take the White House. In poor economic conditions it is very difficult for a president’s party to win, while the inverse is true when the economy is good.
Polling currently shows that President Obama is improving his standing among voters after taking a beating throughout much of 2014. The President’s executive actions on immigration, the minimum wage, and toward Cuba have been quite controversial, but the economy is helping to paper over his problems with independents, who cast their ballots with Republicans in the midterm elections. Politico explains on December 23 that a new Gallup poll shows the President with a 47% approval rating. That is not as good as the President would like it, but it is a sizable improvement over his summer figures, which showed him in the low forties.
Democrats were jubilant at the Commerce Department’s news that third quarter GDP was higher than expected and many tweeted out “5.0” as a shot at Republicans who have been very critical of the President’s economic policies. The Washington Post on December 23 explains that Republicans now have a dilemma for 2016 because if the economy continues to improve they cannot try to weigh down an eventual Democratic nominee, such as Hillary Clinton, with “the Obama economy.” The Washington Post argues that the only case the Republicans could make is that the economic data is good, but is not working for enough Americans in terms of their pay or job availability. However, these arguments are not Republican staples because they often talk about the importance of lower taxes and deregulation. Republicans are not typically supporters of minimum wage increases, at least on the federal level, and it would be difficult visualizing a 2016 presidential nominee talking about income inequality and structural problems in the American capitalist system. Another dilemma for Republicans is that their fight for fiscal austerity could be undermined by a growing economy. A Brookings Institution piece about the federal deficit on December 22 explains that the federal debt is sustainable as long as the economy keeps growing and no immediate debt crunch exists, but that only supposes that the caps on defense spending and other parts of the federal budget are not lifted per the terms of the Budget Control Act of 2011. A growing economy can make voters less alarmed about the growing federal spending and might actually lead to pressure to remove the caps, which could see a reduction of federal spending from 6.8% of GDP today to 5.5% of GDP in 2021. This would be well under the average rate of federal spending over the last four decades, which clocked in at 8.3%. If those caps are removed, though, the U.S. could face a big crunch as interest rates will rise in the future, thereby making the debt more costly, and less money would be available to prolong entitlement programs that are in dire need of reform. In the long-term Republicans might win their argument for austerity, but in the short-term, with a booming economy, anxieties about the debt may dissipate and thereby remove one of core issues Republicans like to talk about on the campaign trail.
When designing speeches on “Who will win the presidency in 2016” extempers need to pay attention to the economy. If you think the economy is going to be good in 2016, with unemployment down to its pre-Great Recession levels and GDP growing at a healthy amount, then you should pick a Democrat to win. If you think economic anxieties will persist or there is the possibility of a downturn over the next two years, then you will want to choose a Republican. If you get questions about who may win the Democratic or Republican nominations and you think current economic anxieties will dissipate, your best bet is to use the economy as a point in your speech and choose a moderate candidate. Good moderate choices would be Hillary Clinton for the Democrats and Jeb Bush for the Republicans. As Politico explains on December 23, if economic conditions improve, the chances of a populist candidate emerging from the left-wing of the Democratic Party and the right-wing of the Republican Party are greatly reduced. Potential candidates such as Senator Elizabeth Warren, Senator Bernie Sanders, Senator Rand Paul, and Senator Ted Cruz, who have fashioned their unique brands of economic populism, would be less attractive in an environment where fewer Americans are concerned about income inequality, question the American economic system, or fear the growth of federal spending. Some may roll their eyes at a Bush-Clinton matchup, reminiscent of 1992, but if the economy improves the chances of that general election matchup happening also improve.
Therefore, the economy will continue to be a topic of conversation in extemporaneous speaking rounds in 2015. Questions will likely ask you to analyze the political impact of the economy’s performance, how the economy might perform in 2015, and whether America’s current rate of growth is sustainable. I highly recommend continued reading about the nation’s unemployment numbers, measures of consumer confidence, and most importantly, what the Federal Reserve is going to do with interest rates. These three factors will tell a lot about where the economy is headed as more jobs and more confidence can produce greater consumer spending, while the Federal Reserve’s actions will be of significant interest for the investment and business communities.