The Commercial-News, Danville, IL

November 22, 2012

Five economic trends to be thankful for

By Neil Irwin
The Washington Post

— There is a dirty little secret about economics writing. The thing that offers the surest path to glory to front page play for a story, to lots of Web traffic, to a pat on the back from editors is doom and gloom. When we can point out something that is awful, whether it is a collapsing job market or rising poverty or skyrocketing gasoline prices, the world seems a whole lot more interested in what we have to say. It's not for nothing they call economics the dismal science.

But Thursday is the day each year Americans set aside to give thanks for what they have, to bask in the good around them. So for Thanksgiving, this economics writer decided to cast aside the usual practice, fire up FRED (a database of economic statistics maintained by the St. Louis Fed), and keep looking until I found five trends that are unambiguously positive.

This is what I found; these are the things that Americans have to be grateful for in these times of economic challenge.

— Household debt is way down. For the quarter-century leading up to the great recession at the start of 2008, Americans accumulated ever-larger piles of debt, both in absolute terms and relative to the size of the economy. Home mortgages were the largest portion of that, but it also included credit cards, auto loans, and student loan debt. The good news is that in the past three years, Americans have made remarkable progress cleaning up their balance sheets and paying down those debts. After peaking at nearly 98 percent of economic output at the start of 2009, the household debt was down to 83 percent of GDP in the spring of 2012. That represents debt reduction of $636 billion, or more than $2,000 for every man, woman and child. It should be noted that some of the decline came about because of debt being written down (such as in mortgage foreclosures), not paid off. But the simple fact is that excessive household debt played a major role getting us into this mess; we're well on our way toward fixing it.

— The cost of servicing that debt is way, way down. Not only do American families owe less money than they did a few years ago, the price of maintaining that debt is much lower than it once was. In late 2007, debt service payments added up to a whopping 14 percent of disposable personal income. Now it's down to 10.7 percent, about the same as in the early 1990s. That reflects both Americans reducing their debt burdens (see above), and ultra-low interest rate policies from the Federal Reserve that has reduced the rates paid on debts that remain. Translation: It costs Americans $403 billion less, or about $1,300 per person, to make their debt payments than it would if debt service costs were still at their 2007 ratio.

— Electricity and natural gas prices are falling. Americans who cook or heat their homes with natural gas are seeing big savings, thanks to falling prices for the fuel: The retail price for consumers' gas service piped into their homes is down 8.4 percent in the year ended in October. The lower wholesale price of natural gas is also pulling down electricity prices; they are off 1.2 percent over the past year. Since these are both utility costs that people can't control much in the short-run, that translates directly into more disposable income for Americans to use for everything else they want or need to buy. And in percentage terms, it is most helpful for the middle income and poor, who spend a greater proportion of their income on basic energy needs. For a lower middle-income family making between $19,000 and $35,000, that comes to about $43 in savings.

— Businesses aren't firing people. The job market has been underwhelming in the economic recovery that officially began more than three years ago, and unemployment remains high at 7.9 percent. But there is some hidden good news in the jobs numbers. While businesses aren't adding new workers at a pace that would put the hordes of unemployed back on the job very rapidly, they also aren't slashing jobs at a very rapid clip. Private employers laid off or discharged 1.62 million people in September, according to the Labor Department's Job Openings and Labor Turnover data. That may sound like a lot, but it's near the lowest level in the decade the data goes back. During the depths of the recession, employers were slashing more than 2 million jobs a month. And even during 2006, which was in theory a good year for the economy, employers slashed an average of 1.66 million workers a month, more than they are now. It is a sign that even though employers aren't adding jobs in large numbers, they also are reasonably happy with the workers they have and are not dismissing workers in unusually large numbers. It's a good time if you already have a job.

— Housing is dramatically more affordable. People often speak as if higher home prices are an unambiguously good thing, but that can be misleading. Sure, a retiree looking to sell off a large house and live in a small condo instead benefits from high home prices. But most everyone else is either better off when buying a home is more affordable rather than less. But to put some more concrete numbers on this idea, I made a simple model to look at what a typical American family would actually have to pay to buy a house over time. Assuming the person took out a 30-year fixed rate mortgage at the prevailing rate in an amount 80 percent of the median home sales price across the country (meaning that they put 20 percent down, allowing them access to low, "conforming" mortgage rates). In the spring of 2006, that typical American home buyer would have faced a monthly mortgage payment of $1,247 a month, or a whopping 41 percent of the monthly average wages of private sector workers. But in the six years since then, home prices have fallen, so have mortgage rates, and wages have risen with inflation. Add it all up, and in the spring of 2012 that median American house would require a mortgage payment of only $889 a month, which is 26 percent of the average private sector employee's pay. For workers just starting out, young families, or those looking to buy a bigger place, that is hard to beat.

Those five trends add up to a delicious mix.