A number of factors are putting downward pressure on the American economy. At the same time, various trends are giving economic growth a boost. This interplay, which often is reflected in the stock market’s level of volatility and vast swings, has left many confused and unsure of what’s next. Surprisingly, a number of driving factors and trends reveal much about where we are headed.

Has the Steam Run Out?

Intellectual property, often referred to as creations of the mind that can be incorporated into tangible objects, has become the primary source of competitive advantage for both companies and countries. When intellectual property is employed to drive innovation, and in turn, boost productivity, the results can be tremendous. In fact, they often include an increase in corporate profits, job creation, national economic growth, wages, and standards of living.

Then it’s no surprise that all eyes are on intellectual property, innovation and productivity — defined as the value of output produced by a unit of labor or capital. Unfortunately, in recent years, non-farm productivity has decreased from 2.6 percent during the period of 2000 to 2007 to 1.5 percent from 2007 to 2013, the Bureau of Economic Analysis says. And there are many reasons why.

The Great Recession’s impact on output and labor certainly has wreaked havoc on the metrics. But that’s not all. The development and implementation of past innovations, like the cotton gin, steam engine, railroads, telephone, electricity, petrochemicals, internal combustion engine, and plastics all led to increases in efficiency and, in turn, productivity. However, many economists say the gains from these innovations — as well as the more recent, including pharmaceuticals, computers and the internet — have peaked and will continue to decline, contributing less to productivity growth. I disagree, but admit we may be in a lull.

Productivity gains captured from dated innovations likely are declining.

Productivity gains captured from dated innovations likely are declining. But I would argue that new and innovative applications derived from computers and the internet are in their infancy. And the next big innovations on the scene, like green industries, cloud storage and greater computing power, smart phones and tablets, hydraulic fracturing, 3D printing, advanced materials and robotics, energy storage, nano technology, and biotechnology also are in their early stages of growth. And although their effect on the economy has been relatively minimal to date, their impact over the long term could be a large and a significant driving force for economic growth.

Consumer Confidence at Issue

A variety of other factors are having an immediate impact. For example, due to continuing concerns about job stability and the economy, many American consumers still are not as confident about their future as they were prior to the recent recession. And there’s good reason. Although the recovery is underway, few feel the benefits.

For example, in 2013, after adjusting for inflation, the median household income was $51,939. This means half the population made more than this and half made less. The problem: this figure is considerably lower than it was in 2007, before the recession began, and about the same as was registered in 1995, according to data from the U.S. Bureau of Census.

This sentiment is echoed by survey after survey. For example, according to a November 2014 survey by the Wall Street Journal and NBC News, “Americans remain broadly frustrated with their personal financial situation, as well as with the economy as a whole. The survey found that 56 percent believe that economic and political systems in the U.S. are stacked against them, while 40 percent disagreed with that view. Those numbers have held steady since 2012. Roughly half of the respondents, in describing their personal financial situation, said they were treading water.”

In The Spotlight

In turn, many Americans have curtailed spending to save money and pay off debts. Since consumer spending, known as personal consumption expenditures, represents approximately 70 percent of gross domestic product (GDP), any decrease has and will continue to have a significant impact on overall economic growth.

Another important factor impacting confidence involves home ownership. The massive decline in housing values throughout the recession, which translated into a deterioration in the largest assets of many, reduced the wealth of millions of Americans. As a result, as of June 2014 (most recent data), 5.3 million homeowners still owed more on their homes than their homes were worth, and another 10 million borrowers had less than 20 percent equity, says CoreLogic, a financial and real state research firm. Although the housing market has significantly improved, there still is a long way to go. Stated by Neil Irwin, senior economics correspondent for The New York Times, “Even years after the housing burst, the United States is building far fewer houses than would be expected given demographic trends.”

One reason: many young adults have delayed home purchases. Paying down college loans, poor job prospects or jobs that just aren’t paying enough are factors that have contributed to a reluctance or inability to take on a home mortgage. Consequently, many still live with their parents. This is reflected in a September 2014 Pew Research report that indicated roughly one-in-four young adults age 25 to 34 lived in multi-generational households, up from 18.7 percent in 2007 and 11 percent in 1980.

Uncertainty and Availability

As U.S. industry struggles to regain momentum, many companies remain unsure of their corporate liabilities in terms of taxes and employee healthcare premiums. As a result, many continue to hold cash, invest more cautiously and resist hiring. In some cases, CEOs have indicated they are trying to keep their number of employees under the threshold mandated by the Affordable Care Act, known as Obamacare, so as not to be subject to the employer mandate and have to pay for employee healthcare. Thus, it’s not surprising that 25.9 percent of Texas manufacturers surveyed by the Dallas Federal Reserve in August 2014 said they are employing fewer workers due to the Affordable Care Act.

The United States is experiencing a worsening skills shortage even though unemployment continues to remain elevated. And multiple factors are responsible. For example, baby boomers, those born between 1946 and 1964, continue to retire in droves. The problem: they are taking their skills with them. In addition, after reaching their highest labor force participation rate of 60 percent in 1999, participation among women has declined, according to the U.S. Bureau of Labor Statistics. In addition, the U.S. Census Bureau says the mobility of adults aged 25 to 29 is at a 50-year low, largely a result of the Great Recession and the ongoing period of slow economic growth. Consequently, fewer young people have been able to relocate to seek or accept new jobs.

This is a growing problem for American companies. To a large degree, the future success of American businesses depends on their ability to find talented employees who can think critically, solve complex analytical problems, learn new skills quickly, and implement increasingly sophisticated technologies. If companies can’t find workers with the necessary skills and attitude, corporate growth potential will be limited, and in turn, economic growth will be suppressed — another factor depressing U.S. expansion.

The High Cost of Gridlock

U.S. economic growth has suffered for other reasons as well. The inability of Congress and President Obama to effectively deal with various issues, including the debt ceiling, fiscal cliff and sequester, or to reform the tax code, has resulted in little confidence that the government will do the right thing. And even after the 2014 midterm elections, uncertainty continues in terms of future corporate liabilities or the direction of fiscal and monetary policy moving forward.

Since tax policy is partly designed to encourage certain behaviors, its absence encourages others.

Uncertainty, especially in terms of fiscal policy, can have serious consequences. Since tax policy is partly designed to encourage certain behaviors, its absence encourages others. Overall, the impact of uncertainty may have been deeper than many have suspected. For example, many CEOs have indicated that uncertainty has paralyzed their decision-making processes and resulted in their companies failing to invest their profits or hire new employees.

Congressional gridlock and an inability of our policymakers to come together to execute necessary reforms is at the root of the problem. And gridlock is likely to continue even though the Republican party now has control of both the Senate and House of Representatives. This dysfunctional political system, with divisions as deep if not deeper than the period during the Vietnam War, has made compromise extremely difficult. If our government leaders continue in this manner, and are unable to implement legislation to enhance American competitiveness, economic growth will continue to suffer.

Slower Global Growth

In late 2014, many international organizations downgraded economic growth projections for countries across the globe. For example, measured in GDP, China’s rate, which reached double digits for decades, is projected by the IMF to decrease to 7.4 percent this year and 7.1 percent in 2015. And emerging markets as a whole also are projected to decline to 4.4 percent this year and 5 percent in 2015. Surprising to many, advanced economies are anticipated to increase to 1.8 percent and 2.3 percent in 2014 and 2015, respectively, but remain lower compared to historic levels.

As a result, world growth is estimated to remain at 3.3 percent this year and slightly rise to 3.8 percent in 2015. Slower growing markets abroad will continue to curtail American exports, which will negatively impact economic growth at home.

U.S. GDP growth, which registered -2.1 percent in the first quarter of 2014, reached 4.6 percent and 3.9 percent in the second and third quarters, says the Bureau of Economic Analysis. Various estimates for the year come in around 2 percent. Overall, in the short term, a number of factors will continue to depress American growth. However, over the longer term, the United States has a bright future, and relative to other countries, is positioned to excel.

This articles appeared in Global Impact, a Great American Insurance Group publication, December 2014.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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