Were you returning from a year off, you might think you hadn’t missed much. Stock markets must have been boring: The S&P index of 500 shares is ending 2011 at about the same level as it ended 2010. As for currency markets, not much action there: At the end of last year it took $1.30 to get you a euro, almost exactly what you pay now. And $1.55 to pick up a pound sterling, almost to the penny what it costs as this is written. Oh yes, and Dominique Strauss-Kahn, who at the beginning of this year was pronouncing on matters affecting the world economy, used a talk in Beijing last week to make a similar set of pronouncements. It would appear to anyone out of touch this year that it was business as usual for DSK in 2011.
All of which makes it seem as if we have just lived through a peaceful year. But that ignores that unnerving old devil—“volatility.” During the year, the S&P index soared at one point to over 1,350, before plummeting to around 1,100, and rising again to where it started the year, at around 1,250. The euro soared to close to $1.50 before tracing a jagged course back to the level at which it ended 2010. And rather widely publicized events intervened between DSK’s rather similar comments on economic policy.
Not all indicators of what went on in the U.S. economy are ending this year about where they ended the last. At around the end of 2010, U.S. debt, then bearing a proud triple-A rating, stood at about $13.6 trillion. After a year of profligacy and political stalemate it now comes to a down-rated $15 trillion and rising, about equal to the nation’s GDP. The triple-A rating, held since 1917, is a thing of the past. Were it not for the safe haven status of the U.S. as the eurozone moves from crisis to crisis, the bond vigilantes would have turned their attention from Europe, and driven up U.S. interest rates. So far, America continues to benefit from being the best house in a bad neighborhood or, as one wag put it, “The U.S. dollar wins the least-ugly award.”
In 2011, the economy seemed to have found what has come to be called “the new normal”—growth, but too slow to revive the job market. After threatening to take another dip in the recession pool, the economy settled down to a 2 percent growth rate. Better by a lot than a recession, but insufficient to strengthen the jobs market significantly, and slow enough to border on stagnation. The year began with 13.3 million workers unemployed and ended with 14.5 million out of work. Because the labor force participation rate dropped—roughly, the portion of the population in the work force—the unemployment rate fell from 9.4 percent at the end of 2012 to 8.6 percent last month, the lowest level since March 2009. Add in workers too discouraged to look for work, and those working short hours because employers don’t have enough work to fill their days, and the total wishing they could find full-time employment comes to over 24 million workers, or almost 16 percent of the workforce. Little wonder that the phrase “jobless recovery” is heard in the land. Or that President Barack Obama is struggling to regain the support of blue collar workers and the younger voters so crucial to his last campaign, now graduate members of the reserve army of the unemployed. There are signs that the jobs situation is improving, especially if fourth quarter growth comes in at the 3-4 percent range economists are now predicting as they frantically scramble to upgrade the forecasts they have until now been frantically scrambling to downgrade. We will know more when the next survey of the labor market is published on January 6.
We do already know that 2011 saw the development of a phenomenon that had long been resisted by trade unions—a two-tier labor market. Business publisher BNA estimates that some 20 percent of American workers are now covered by contracts that pay new workers far less than older ones, half as much in the auto industry. This is increasing the competitiveness of U.S. companies, but making it more difficult for blue-collar workers to earn their way into the middle class. It is unlikely that this two-tier trend will be reversed even as the economy picks up speed.
This year also saw the housing market struggle to realize its long search for the bottom from which there is nowhere to go but up. Construction of new single-family homes rose by 2.3 percent in November, and of apartments by 32 percent, the latter in response to increased demand for rental units. Still, the 430,000 homes and 185,000 apartments and townhouses built were about half the number that would be started in a healthy economy. Since each home built creates three jobs according to the National Association of Home Builders, a more normal level of activity would have produced close to two million new, sorely needed jobs. (Next week we will take a look at all of the data, including inventories, sales, and new mortgage applications to tease out the probable performance of this key sector in the new year.)
Finally, no tabulation of economic developments in 2011 would be complete without mentioning that it was a year in which politics trumped economics. American banks are better capitalized and better able to lend than ever before, corporate treasuries are overflowing with cash, and consumers are showing hints of unzipping their wallets. But the economy falters as the political class introduces a high degree of uncertainty and demonstrates an appalling commitment to ideology über alles, with compromise a dirty word. Deficits continue to run at unsustainable levels, debt hits a level worthy of a banana republic (with apologies to those banana-growing countries around the world that may be well managed), Republicans continue to pretend that inequality is not increasing, and Obama that he can right things by taxing “millionaires and billionaires.” Were it not for the fact that election year 2012 is likely to see even more damaging political wrangling, we would happily look forward to ringing in the new.
Let me take this opportunity to wish all of you a wonderful holiday season.