Five and a half years have now passed since the U.S. economy first emerged from its worst recession in the post-war era. Economic growth has averaged a solid yet unspectacular 2.2 percent during this period, a pace that has proved sufficient to allow the unemployment rate to drop back below 6 percent and pull capacity utilization back up near its long-run average of around 79 percent.
The modest pace of economic growth has provided a false impression that the recovery is still in its infancy, even though the current economic expansion is already slightly longer than the average for the postwar period. Indeed, many recent public opinion polls have shown that slightly more consumers believe the economy is still in recession than believe conditions are recovering. And a whopping 78 percent of voters in November’s midterm election noted they were either concerned or somewhat concerned about the economy.
The combination of years of unusually slow economic growth, particularly following such a deep recession, and sluggish income growth likely explain a great deal about consumers’ frustration with the pace and composition of economic gains. Not only has economic growth been slower than in recent recoveries but the gains appear to have been more uneven, which has given rise to a new sense of urgency for monetary and fiscal policies to address growing issues surrounding income inequality.
Years of modest growth and extremely accommodative monetary policy have also reduced volatility in the financial markets and possibly provided a false sense of comfort that there are fewer imbalances currently present in the economy and that the recovery has plenty of room to run. While we see the pace of economic growth picking up over the next couple of years as more sectors come back online, the risks have also increased. The energy and technology sectors, two of the workhorses through the first five and a half years of the recovery, are beginning to show their age. Other areas will need to step up if overall growth is going to accelerate.
Stronger job and income growth has put the consumer in a much better position. Wage and salary growth accelerated this past year, rising 5.1 percent. That was strong enough to keep consumer spending growing at a solid pace, even though expanded emergency benefit payments were reduced at the start of the year. Improving job and income growth and lower gasoline prices should keep spending on pace in 2015. Consumer confidence has revived smartly in recent months, suggesting that consumers feel better about their finances. Confidence is currently at its highest level since the recession ended and most measures of household finances, including the savings rate, financial-obligation ratio and various measures of credit quality, all suggest that consumers are in a better position to spend in the coming year.
Businesses are also notably more upbeat about the economic outlook going into the new year. Measures of CEO and small business confidence both improved during the second half of 2014 and more businesses plan to increase capital spending and add staff during the coming year than at any other point since the recession ended. Even the construction sector appears headed for better days, with both residential and commercial construction set to post stronger gains in 2015.
Connecticut and much of New England has faced an even more arduous road to recovery than the nation has. Job growth has tended to be slower and overall economic growth has generally lagged behind the nation in most of the region. Nonfarm employment has risen just 1.4 percent in Connecticut over the past year, which lags behind the nation as whole.
Moreover, much of the growth in jobs has been in lower paying industries, including restaurants, retailers, social assistance and administrative jobs. Manufacturing continues to struggle with tighter defense budgets and the state’s housing sector is still weighed down with legacy issues from the housing bust.
The recovery has been strong and more broadly based in the region’s major metropolitan areas, particularly Stamford and Boston. Both areas benefit from the resurgence in the financial markets and growth in the asset management sector. By contrast, the insurance industry has faced a tougher recovery and provided less of a boost to Hartford.
Wells Fargo expects conditions to improve in 2015. The U.S. economy appears poised for its strongest growth since the recession ended five and a half years ago. Growth should not only be stronger but also more broadly based, as every segment of the domestic economy (consumer spending, business-fixed investment, homebuilding and government) making a positive contribution. With growth accelerating, the Federal Reserve will begin to normalize interest rates around the middle of the year and may ultimately raise the federal funds rate by three-quarters of a percentage point.
Connecticut should also see growth improve in 2015. Employment growth should improve modestly from its most recent pace, as hiring in financial services and professional services turns up. Wells expects businesses to add close 30,000 jobs across the state in 2015 and look for the unemployment rate to drop by at least a half percentage point to 5.8 percent.Â
Mark Vitner is managing director & senior economist for Wells Fargo Bank.
