U.S. Economy 2012 vs. 2007: Rates, Jobs & Policy

U.S. Employment Trends: 2007–2012

Between 2009 and 2011, 6.1 million workers were displaced from jobs they had held for at least three years. By 2012, employment statistics appeared more optimistic. Although 1,340 mass layoff actions occurred in July of that year, the Bureau of Labor Statistics reported that productivity increased 2.2 percent in the nonfarm business sector during the second quarter of 2012, while manufacturing productivity grew 0.1 percent. During the same year, demand for workers also grew in wholesale trade and retail trade, while employment in the food and drink sector remained constant.

The overall jobless rate decreased across a large number of areas, and from April to July alone, employment rose from 2.1 million to 19.5 million. In June 2012, the Federal Reserve System noted that the economy had been moderately expanding and that business fixed investment had continued to advance. Household spending also appeared to be rising slowly — more than in earlier years, though less than in 2011. The housing sector, however, remained depressed.

Inflation declined in 2012, largely due to reduced prices for gas and oil, and longer-term inflation expectations remained stable (Board of Governors of the Federal Reserve System). Measured by the consumer price index (CPI), the inflation rate reached an all-time high of approximately 5.6% in 2008, dropped to negative territory in 2009, but climbed steadily thereafter. By 2011, the rate had risen to approximately 3.6%, before falling to approximately 1.4% by mid-2012 (Global-Rates.com).

Inflation and Interest Rate Conditions

Interest rate levels remained constant at 3.25% between 2011 and 2012 — a figure that had been unchanged since 2009. The prime rate is an important index used by banks to set rates on many consumer loan products, such as credit cards and auto loans. When the prime rate rises, variable credit card rates rise as well.

The federal funds rate — the interest rate at which banks and other depository institutions lend money to one another, typically on an overnight basis — also remained constant, last recorded at 0.25% in both 2011 and 2012. This rate controls the supply of money and, in turn, the level of inflation and other interest rates. Raising the rate makes borrowing more expensive, thereby reducing the money supply and curbing inflation. Lowering the rate has the opposite effect.

Two strategies stand out as viable federal approaches to encouraging greater consumer spending and creating employment opportunities.

Federal Strategies to Stimulate Consumer Spending

The first is the Obama Innovation Strategy. This initiative reviewed historical patterns and identified that spurts in innovation encouraged greater consumer spending, which in turn generated additional employment. To build on this, the administration proposed investing more than $100 billion in Recovery Act funds to support innovation. The strategy comprised three components:

Invest in the Building Blocks of American Innovation — funding the conditions necessary for innovation to occur. Promote Competitive Markets that Spur Productive Entrepreneurship — encouraging U.S. entrepreneurs and companies to compete globally. Catalyze Breakthroughs for National Priorities — applying innovation to help government achieve its core objectives. In this way, the relationship is reciprocal: government supports public innovation, and innovation, in return, serves government priorities (National Economic Council).

The second strategy, proposed in the Rochester Business Journal, involves cutting the tax rate on manufactured goods. Reducing this burden would encourage greater consumer purchases and, consequently, create further employment opportunities. A strong majority of respondents to the RBJ Daily Report Snap Poll agreed that manufacturing should be singled out for a lower tax rate, and nearly all respondents indicated that manufacturing job growth is important to the health of the U.S. economy. While the Obama administration initially proposed a larger tax cut — originally as low as 25% compared to the existing 35% rate — many economists and commentators argued that even deeper cuts would stimulate more spending and thus create more jobs.