The Economic Rebound

by Sergio Mariaca on Jul 1, 2011 4:25:00 PM |Share:

economic rebound economic recovery unemployment recession global recession

Although the U.S. economic recovery began in June 2009, many investors and business owners still don’t feel the full rebound from the recession, and a range of indicators show that the economic recovery has been the worst, or one of the worst, since the government began tracking such data after World War II:  

•    The only time unemployment was higher than May’s 9.2% rate at this point in a recovery was 2 years after the 1980 recovery during the 1982 recession.
•    The inflation-adjusted after-tax incomes of America are up only 2% since June 2009 and haven’t grown so meagerly in the early stages of any other post-WWII upturn.
•    The nation’s annual inflation-adjusted economic output is up 5.5% from where it stood at the recession’s end and has advanced by less only one time in the first 2 years of a recovery—the 1980 recovery.
•    Home prices were down 8.8% 18 months into the recovery, adjusting for inflation, and are much worse than they were during the 1991 recovery.
•    Bank lending to businesses and households is down 4% since the recovery started, which is also the worst on record.

Another problem is that, for the first time in decades, America is losing and not attracting net growth capital. That may be the single most important explanation for our persistently high unemployment and stagnant wages.

In addition to this, many Americans are taking their investment dollars abroad at a faster pace than foreigners are bringing capital to the U.S.  In 2010, for example, U.S. investment abroad was $351 billion—$115 billion higher than foreign investment here.  (Source: WSJ July 5, 2011)

One of the other reasons that we have had a lack of economic recovery is due to our U.S. tax system, with its high rates and global reach. Many savvy investors and entrepreneurs constantly search for ways to minimize the impact of U.S. taxes, and some private-equity firms have relocated U.S. companies or divisions to tax-friendly countries. Some U.S. start-ups are even beginning life offshore. As other countries have reduced corporate taxes, the U.S. has one of the world’s highest tax rates, at 35%. The U.S. is also one of the few developed countries that still seeks to tax their companies’ global earnings; most countries tax only profits earned inside their borders.  (Source:  WSJ, June 24, 2011)

However, as mentioned earlier in this report, the news isn’t all bad. Corporate profits, manufacturing employment and exports are performing at least as well as they have in several other recoveries. Profits, for example, were up 47% over the first 21 months of the recovery. On average since WWII they have risen about 35% over that stretch. (Source:  WSJ July 5, 2011,)

Many corporations around the world responded aggressively to the global recession, clamping down on spending and hoarding massive piles of cash. In the United States, where cost-cutting was especially dramatic, non-financial firms hold close to $2 trillion in cash, equal to a record 7% of total assets. (Source:  WSJ July 5, 2011)  Much of this excess cash will be used to increase dividends or be channeled into acquisitions and other capital investments aimed at improving competitiveness and productivity. There is also a good possibility that they may rehire some of the employees that were laid off during the recession. Many investors believe these corporate actions could be a major catalyst driving stock prices higher.

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