The State of the US Economy: Part 5 of 5

In the first four parts of this series, I've covered:

1. 50 (scary) statistics about the US economy;
2. The 'debt bomb';
3. Economic problems caused by politicians and pressure groups;
4. The 'culture of entitlement' and its drain on our economy.

In this final instalment, I'd like to look at the challenges facing us as individuals, and what we can do about them.

First, let's realize that we live in an economy in transition. During the 18th century and much of the 19th century, it was primarily agrarian, focusing on farm products and related goods and services. From the mid-19th century to the last quarter of the 20th century, it became industrial, focusing on the production of manufactured goods. With the advent of computers, and the widespread export of manufacturing to countries with lower wage costs, our economy became more informational, relying on intellectual economic activity rather than physical. Some refer to this as a post-industrial society. This has simultaneously seen the rise of the service economy, where services provided to others replace the production of goods as the main source of jobs. The US economy is now almost entirely service-based in terms of its Gross Domestic Product (GDP).

The chart below (courtesy of Wikipedia, using data from the CIA World Fact Book 2006) shows world GDP and employment in terms of three economic activities; Agriculture, Industry and Services. Click the chart for a larger view.




As you can see, the countries of the First World are heavily blue-shaded, indicating a mixture of industry and services as the dominant forces in their economies. Central Africa, with very little industry but much subsistence agriculture, is the furthest removed from the First World mix.

We're concerned with the US economy in these articles; but we can't lose sight of the economies of the rest of the world, because what they do impacts us, and vice versa. If the rest of the world can produce the same goods that we can, at a cheaper price, they'll displace US manufacturing activity entirely (as has already happened in a great many areas; China is now the center of world manufacturing). Even in the information economy, if high-technology 'production' (e.g. programming, systems development, etc.) is cheaper to conduct off-shore using foreign labor and skills, this will displace US information workers (again, this has already happened in many sectors; India is becoming a world hub of low-cost, high-quality data processing activity). All these developments mean fewer jobs available in the USA.

We've already seen that the US economy is in trouble, as is also the case in almost all First World countries. To sum up just a few of the headlines from the past couple of weeks:

• Of every dollar of real income growth that was generated between 1976 and 2007, 58 cents went to the top 1 per cent of households (which has profound consequences for the rest of us - see the article for details).
  
• Young job-seekers have been hit by a 'triple whammy': "The economy is still wobbly, the federal stimulus money that funded many summer jobs last year is gone, and now young people face growing competition from people old enough to be their grandparents".
• Lenders may foreclose on more than 1 million homes this year;
• Despite fantastic claims by the Administration that stimulus measures have saved or created up to 3 million jobs, other, more realistic estimates put the number at only about 20% to 25% of that figure - and many of those were temporary jobs, such as workers hired to conduct the 2010 census, who have since been dismissed.
• Consumer spending (which accounts for approximately 70% of US economic activity) continues to decline, with retail sales slowing even further from their already-low levels and consumer confidence plummeting.
  
• So many governments are looking to stimulate their economies through issuing new debt (i.e. government bonds) that the global bond market is becoming saturated with demand. As a result, weaker countries will have to pay exorbitant interest rates in order to attract investors away from the 'safer' bonds of stronger economies, and companies who also rely on the bond market to finance their operations (or roll over older debt into new bond issues) may find themselves 'squeezed out' altogether.
• The US treasury has already sold $3.96 trillion in bonds to foreign investors, but intends to sell trillions more over the next few years to finance US government spending - at a time when many other governments and companies will be trying to do the same thing. One must question whether the bond market can absorb such large quantities of US debt. If it can't or won't, the US government will very quickly run out of money to pay for its activities. All it will take is for a major purchaser (for example, China, which currently holds almost $870 billion in US bonds) to refuse to buy more, or - even worse - sell its current holdings into an already-overtraded market. That would be catastrophic for the USA.
• 96 US banks have failed so far this year. How many will fail by the end of the year? Nobody can say for sure.
• The state of Illinois currently owes over $5 billion to creditors for goods and services already purchased or incurred - and it can't pay those bills. California isn't far behind, as are Michigan and New York. What happens if these states end up going bankrupt, unable to pay even their employees?

There's no question that the US economy is nowhere near ready to emerge from the recession/depression of the past couple of years. In fact, employment may take well over a decade to recover. In what Ezra Klein of the Washington Post calls "The scariest jobs graph you've seen yet", the Brookings Institute points out:

In recent months . . . we described the job gap -- the number of jobs it would take to return to employment levels from before the Great Recession, while also accounting for the 125,000 people who enter the labor force in a typical month. After today's employment numbers, the job gap stands at almost 11.3 million jobs.

(Click the graph for a larger view)

How long will it take to erase this gap? If future job growth continues at a rate of roughly 208,000 jobs per month, the average monthly job creation for the best year for job creation in the 2000s, it would take 136 months (more than 11 years). In a more optimistic scenario, with 321,000 jobs created per month, the average monthly job creation for the best year in the 1990s, it would take over 57 months (almost 5 years).

More than a decade to recover the jobs recently lost in the US economy? That's a horrible prospect . . . but it's founded on solid fact, not speculation. Those currently unemployed may not find new jobs for years to come; and if they do, it's unlikely to be at comparable wages, or with comparable working conditions and benefits, to those they've lost. That's the reality we're facing.

So what can be done? If you, as an individual, are facing a period of unemployment, wondering what you have to do to find work, worrying about the future, what concrete steps can you take now - and advise your children and loved ones to take now - to put yourself in the best possible position to weather this financial storm?

Here are a few suggestions.

1. Minimize your debt load. Pay off every debt you can, as quickly as possible, while you still have an income to do so. Scrimp and save in every possible way to pay off your debts, so that what comes into your pocket can stay there. Don't buy on credit any longer. If you can't pay cash for it, do without. Cut up your credit cards. Don't sign any new hire-purchase agreements.
2. Spend less. Make a list of what's really essential, and put every cent not needed for those things into a savings account (after paying off your other debts - see above!). Build up a reserve of a minimum of three months' expenditure (preferably six months or more, if you can afford that), in case of sudden layoff or other problems. (See Secrets Of Extreme Savers for some useful tips.)
   
3. Learn skills that you can use without having to pay others. For example, there's plumbing, basic electrical work, carpentry, gardening (particularly for food - see below), motor vehicle maintenance, and so on. If you can learn to do the basics in those areas for yourself, that's an awful lot of money you won't have to pay to others to do them for you.
4. Grow your own food. Anyone with a back yard can devote some of it to vegetable gardening, or (depending on local ordinances) a chicken coop or rabbit hutch. Even if you only have a balcony in an apartment, you can grow some foods in boxes or buckets. Recommended resources: Square Foot Gardening and The New Self-Sufficient Gardener. You'll be surprised how much you can save by not having to purchase your vegetables (and how much more healthily you'll eat!).
5. In terms of a new job (if you've been laid off), you'll find that most of those available will be low-paying service jobs like waitressing, flipping burgers, etc. Why not think about re-training in a field that offers higher-paying employment? It may take a few years, but consider the long-term benefits. Plumbers, electricians, auto mechanics, air-conditioning technicians, etc. are in constant demand, and there are never enough of them. If you can parlay any severance or unemployment benefits into training in those fields, you'll be making at least $15-$20 an hour once you're qualified, with some fields offering double that. That's a heck of a lot better than minimum wage - and there'll always be something needing repair! You may find it difficult to make ends meet during training, but the short-term sacrifice is worth the long-term gain.
   
6. Make your economic survival a family project. Don't tackle it on your own, as the 'bread-winner', or with your spouse only; involve your children. Everyone can do certain jobs around the house to take some of the load off others (particularly those who are fortunate enough to have jobs, and can bring home money to support the family). Encourage your kids to look for part-time work around the neighborhood, to bring in money to buy the things they want. You may not be able to afford that new iPod they want, but if they can earn the money for it themselves, they'll feel a sense of accomplishment - and likely look after it a lot better!
7. Vote for politicians who won't waste taxpayers' money on worthless or non-productive expenses. The nation simply can't afford to subsidize those who are a drain on society, net consumers rather than net producers. Make sure those you elect to local, State and Federal office understand that, and hold them accountable for every law or regulation they enact which costs money.
   

We've got a long way to go, friends. We may not see the back of this recession/depression for a decade or more. Time to think long-term about how you're going to make the best of it.

Peter