Independent Thinking®

New Drivers of the Changing Economy

By Roger Altman
September 19, 2014

Total household wealth in the United States has surpassed the peak recorded in 2007, job creation has surged, and GDP has regained the 5%, or $1 trillion, lost to the financial crisis and subsequent recession. Our economic outlook is improving, more so than many Americans yet realize.


The biggest driver of this growth is consumer spending, typically 70% of U.S. GDP, and on track to gain about 3% this year. Consumer confidence is on the rise as well, fueled by the best job creation rate in 15 years and the lowest household debt-to-income ratios in more than 30 years.
 
Domestic energy production has also been a major contributor to these gains. After four decades of decline, the United States looks set to become the world’s largest producer of oil and gas by next year and should be a net exporter within four years. New technologies are allowing us to access huge, new supplies of natural gas which is, at about $4.70 per 1,000 cu. ft., now cheaper here than anywhere else in the world. This newfound energy self-reliance is a boon for our political security, as well as for our economy, as we eradicate our dependency on foreign oil.
 
The surge in natural gas production has enabled us to reduce our use of coal, the dirtiest fuel, to produce electricity. At the same time, tightened regulation has encouraged car makers to improve their technologies and boost their mileage. All told, carbon emissions in the United States are down almost 10% in 10 years and further reductions look likely. After decades of degrading our environment, it seems that we are at last making strides in defending it.
 
U.S. manufacturing is also looking up, thanks to the increased use of technology in American factories and to rising wages in Asia, which have narrowed the cost-to-product difference, making our domestic production relatively more competitive. The same technological advances mean that the manufacturing sector is unlikely to become a major source of new employment – only 668,000 of the six million manufacturing jobs between 2000 and 2010 have been recovered – but it does seem that U.S. manufacturing is again a stable part of our economy.
 
Many important social trends are showing signs of improvement, too. More than 80% of students complete high school now, an all-time high. Johns Hopkins University predicts that the rate will rise to 90% by 2020, reflecting the efforts of grassroots organizations to reform public schools. College completion rates are also improving, to almost 60%. We have a long way to go to significantly improve our international standing in education, but it seems that we are now heading in the right direction.
 
Other important trends, including violent crime rates and teen pregnancy rates (both down), and overall birthrates (up, including for children born to women with a college education), are all showing substantial progress. The consequences are a higher quality of life, reduced government costs, and a stronger economy.
 
Investors are right to welcome these developments: Our short- and medium-term economic prospects are bright, and many of us are realizing significant benefits. The banking system has been recapitalized and the housing market is on the mend, after being stripped of many of its excesses.
 
It is hardly surprising, however, that many Americans don’t yet feel that the economy has turned the corner. Apart from the continued gridlock in Washington, D.C., which is reason enough to despair, it is clear to everyone that lower-income citizens remain under severe pressure. While it appears income growth will improve soon, median household income is still about 8% lower than before the crisis, and the prospects for those without the education to compete in the new economy are relatively bleak.
 
We will all suffer if this state of affairs continues. If one-third of our society remains unable to fully participate in our economic life, our long-term outlook is shakier than any of us would wish, while the human cost is incalculable. We need to strengthen the social security net and improve the skills of our people.
 
Roger Altman, former Deputy Secretary of the U.S. Treasury, is the Executive Chairman and Founder of Evercore.

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