Despite claims to the contrary from the rightwing pundits, the US economy is in poor shape. Bush's policies have only exacerbated underlying weaknesses and created new problems instead of dealing with fundamental problems. Economic predictions are notoriously fickle and imprecise. However, Katrina's long-term structural and psychological effects may prove to be the final straw for the US economy.
Consumer spending represents 2/3 of the US economy. Therefore, the consumer's financial health and confidence in the future are paramount to national economic health. For the last 4 years, the consumer's financial health has grown more precarious. According to the Bureau of Labor Services, wages for non-supervisory employees have grown 13.24% from January 2001 to July 2005. Over the same time, inflation increased 11.59%, making inflation adjusted wage growth a paltry 1.6% over a five and a half year period. To maintain their standard of living, consumers have engaged in two risky behaviors. First, they have tapped their savings. However, the US savings rate is now at zero 0%, effectively ending that behavior. Secondly, consumers have increased their debt load to record levels. According to the Federal Reserves most recent flow of funds report, total mortgage borrowing increased from 4.64 trillion in 2001 to 9.04 trillion in 2004. In addition, according to the Federal Reserve, household debt service payments now comprise 18.45% of disposable income. In short, the US consumer is nearly tapped out.
Add to this the shock of Katrina. Regardless of who or what governmental agency eventually receives the blame, Katrina delivered a clear psychological blow to the US consciousness, as it exposed extreme ineptitude. Each picture of stranded residents lowered the national faith in its central institutions. Although it is difficult to gauge overall psychology, it is not a stretch to state people's confidence was shaken. And confidence and faith in the future is required to take out debt.
The FDIC, Fed Chairman Greenspan and National City Corporation have all publicly discussed or written reports on the existence of the housing bubble. Although the rightwing pundits claim otherwise, the bubble exists. According to the National Association of Realtors, the national median price of a home increased 31.87% from 2002 -2004, from 158,100 to 208,500. Here is a simple rule of markets: prices don't go up forever. The desire to buy a house is directly tied to confidence in the economy. As mentioned above in the consumer discussion, Katrina's long-term effect on consumer psychology will probably be negative.
Housing is the main engine of growth for the US economy. According to the Bureau of Labor Services, the nation created 1,545,000 jobs from January 2001 to July 2005. Of those 448,000 or 28% were construction related. In addition, the economy created 487,000 financial service jobs over the same time. Assuming 20% of these are mortgage related, we get an addition 97,400 jobs or an addition 6%, bringing the total number of housing related jobs to 34%. That's a large percentage for the economy. In short, when housing starts to slow, so will the engine responsible for the largest percentage of job-growth.
Rising energy prices are another piece in the puzzle. As prices rise they take a larger percentage of a consumer budget that has barely grown in 5 years. In addition, prices are now above the psychologically important $3/level. There are talks of gas lines and shortages in various regions. Compounding transportation costs are winters heating prices. Numerous articles from various states have warned of winter heating price spikes. The US consumer is about to receive a very rude and abrupt slap in the face from energy costs. The length of time of price hikes compounds the effects. Gasoline will take some time to drop at the pump and winter is just around the corner. It is likely that in some markets there will be a solid 6 months of high prices from transportation and heating.
Finally, there is the hampered federal government. The Federal government is in fact the de facto insurer of last resort. To perform this function, it should be in sound fiscal shape. The Republicans, however, are poor stewards of public funds.
First, actual revenue coming into the government is in fact decreasing, despite the recent claims of rightwing economic mouthpieces (I would call them economists, but their reputation is already low enough). According to the COngressional Budget Office receipts from individual income taxes have decreased 18% since 2001, from 994.3 billion in 2001 to 809 billion at the end of 2004. Corporate receipts have increased 25%, but that increase is misleading because total corporate receipts in 2004 were only 24% of the individual total receipts. Much smaller in total than individual and corporate receipts, estate and gift taxes decreased 14% over the same time, falling from 29 to 24.8 billion.
Over the same time period (2001-2004), the Republican controlled Congress increased discretionary spending 33%. The Defense Depart was the largest recipient, receiving a 48% increase in spending. Other domestic also increased 27% over the same period.
In other words, the Republicans have not only clearly violated their "fiscal conservatism" principles, they have once again increased total US debt. In 2001, the total amount of debt held by the public and governmental agencies was 5,807,463,412,200.06 on September 28, 2001. On September 1, 2005 the total amount of debt increased 36.54% to 7,929,658,283,890.28. The policy of tax cuts and a voluntary war - the classic guns and butter economic problem - have placed the country is dire financial straits from which payments for a foreseeable natural disaster will only increase the Republican created fiscal disaster.
And that is where the problem comes in. Because the government is the de facto insurer of last resort, it's finances must be in good shape in order to be the insurer of last resort. If the US had a clean bill of fiscal health right now, the Treasury could go to the bond markets over the next few months and sell the needed debt to pay for Katrina's damage. As it stands, the federal government's position as insurer of last resort will simply increase its total debt to over 8 trillion dollars - roughly 70% of US GDP. Interest payments on the national debt are already one of the largest spending categories of the national budget. And they stand to increase.
In summation, there are numerous problems lurking on the horizon. The initial shock of Katrina will probably lower consumer confidence. Spiking energy prices through the winter will further hurt sentiment. This will lead to lower housing starts and purchases overall consumer spending, as will the lack of national savings and mammoth debt level. The economy is at a point where there are too many negatives to overcome by wishful thinking or political spin. Either we will deal with these lurking issues, or they will deal with us.