How Congress could kill the US recovery

Retail data should give cause for cautious optimism about the US economy, but the Republicans' plan to scrap unemployment insurance lacks intellectual rigour and could prove devastating.

Household spending finished on a high in 2013, but ideological nonsense by the Republican Party over unemployment insurance is attempting to derail the recovery.

Retail sales rose by 0.2 per cent in December, following a downwardly revised gain of 0.4 per cent in November, to be 4.1 per cent higher over the year. Nominal retail sales were 1 per cent higher in the December quarter compared with the previous quarter.

As I mentioned on Monday with regards to job creation (US labour market can withstand the chill, January 13), inclement weather conditions during December had an effect on spending, particularly for automobile sales (down 1.9 per cent in December) and prompted Americans to spend big on winter clothes (clothing up 1.8 per cent). Excluding automobile sales, retail sales rose by 0.7 per cent in December, to be 3.7 per cent higher over the year.

Graph for How Congress could kill the US recovery

Although sales growth was softer than in previous months, growth was solid throughout the December quarter – though with downward revisions perhaps not as strong as I suggested a few weeks ago (The American consumer is back, December 27). That article was based on personal consumption – a much broader measure than retail sales – and I suggested that we could be looking at the strongest consumption growth in eight years. Perhaps it will be only be three years, but still pretty good.

Households continue to feel optimistic and, for many families, it is the first time in years that things are going well. Price gains in the stock market and housing have left households feeling wealthier despite modest income growth, and this has allowed households to splash out throughout the December quarter holiday season.

The big challenge for households and spending in 2014 appears to be political. Congress has failed to reach a compromise on extending unemployment insurance for the long-term unemployed – 1.3 million Americans had their federal benefits cut off on 28 December, a further 850,000 will be cut off by March and potentially another 2 million by mid next year (The US will pay for its short-sightedness on debt, December 20).

Estimates from the Congressional Budget Office suggest that a failure to continue these benefits could wipe off around 0.2 percentage points from real GDP growth in 2014 and reduce employment by about 200,000 jobs.

The Republican leaders in Congress have suggested that unemployment insurance makes people lazy and reduces the incentives for people to find work. The thinking goes that the long-term unemployed are unemployed because they want to be, and removing their income will force them to find a job. But that represents shoddy ideological thinking masquerading as economics.

The US labour market has expanded by almost 200,000 jobs per month over the past two years. Population growth consumes about half of that, so let’s say that 100,000 jobs per month go to the already unemployed.

If – and this is a big assumption – all of those 100,000 jobs went to the long-term unemployed, it would take around three-and-a-half years to clear all of the 4 million who have been unemployed for half-a-year or more. In reality, it would take much longer since employers have a preference for the recently unemployed.

It is all well and good to try and create incentives for people to find work, but there has to be jobs for them to find. At this point in time, the Republican stance on this issue is nothing more than an attempt to create poverty and hurt the poor and working class – at attempt that hopefully reflects a lack of intellectual rigour rather than something more sinister.

This is a Congress that almost derailed the economy over an arbitrary debt ceiling and enforced austerity cuts that prolonged the downturn. Doing stupid things is just what this Congress does. They play politics with people’s livelihoods, their homes, their children and their very way of life.

A failure to extend these benefits – particularly given the meagre cost involved – would prove devastating to the millions who lost their jobs throughout the global financial crisis through no fault of their own. And this I suppose is the crux of it. It wasn’t their fault – they were simply the pawns in a game played by incompetent bankers and politicians. How can you justify not helping them out?

The US economy is finally showing some resilience and getting back on track. There are a number of reasons to feel optimistic about the US economy this year – household spending being just one – but the recovery is an ongoing issue. An extension of unemployment benefits will go some way to ensuring that the recovery remains on track. Hopefully with mid-term elections coming up, Congress will not be stupid enough to harm the economy yet again.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles