This is In Real Terms, a regular column analyzing the latest economic news. Comments? Criticisms? Ideas for future columns? Email me, or drop a note in the comments.
The past year has taught some harsh lessons. Trust polls more than you trust the conventional wisdom, for example — but don’t trust the polls too much. Don’t overestimate how much Americans care about fact-checking, or underestimate how much they hate the news outlets that conduct it. And don’t ever forget how much Britons love to tell off continental Europe.
Compared to the tumult and upheaval that have dominated the political world this year, the U.S. economy in 2016 has been calm, even boring. Job growth held steady. Unemployment fell. Overall economic growth was, as ever, disappointing but not exactly weak. In other words, more of the same.
Still, look a bit closer and you’ll see that 2016 did teach some valuable lessons, while also leaving plenty of questions unanswered for 2017. Here are three of each.
Lesson 1: A strong economy can still bring wage growth
The first several years of the economic recovery, which officially began in 2009, brought positive (though often unimpressive) economic growth, strong corporate profits and steady hiring. But they didn’t bring significant wage gains for most workers. From 2010 through 2014, average hourly earnings rose at a rate of only about 2 percent per year, before adjusting for inflation. Median household income, which plunged during the recession, didn’t rebound at all during the early years of the recovery.
Now, though, that is starting to change. Growth in hourly earnings accelerated in 2015 and 2016 compared to a year earlier, hitting 2.8 percent in October before dropping a bit in November. And data released in September showed that U.S. median household income jumped 5.2 percent in 2015, the best year on record. (Other sources suggest that this growth started earlier and rose more steadily.)
On the one hand, none of this should be a surprise. Early in the recovery, unemployment was high, which meant there were lots of available workers competing for open jobs. That gave companies little incentive to raise pay. Now the unemployment rate has fallen below 5 percent and workers are scarcer, so companies have to work harder — and pay more — to attract and retain talent.
But from another perspective, the recent wage and income growth is, if not a surprise, then at least a relief. Wage growth was disappointing in the 2000s, despite an economy that looked strong on paper, and some economists have worried that a variety of interrelated forces, including rising inequality, automation and globalization, have made it harder for workers to benefit from a rising economic tide. Those fears haven’t disappeared — the recovery has been slow, and many workers are still digging out of a deep hole — but 2016 offered some cause for optimism.
Lesson 2: A strong job market can also draw people back to work
Besides slow wage growth, the other consistent story of the economic recovery has been falling labor force participation. The participation rate — the share of adults who are either working or actively looking for work — dropped sharply during the recession as laid-off workers abandoned their job searches. Then the recession ended and the rate kept falling. By late last year, the participation rate was near a 40-year low.
Economists generally agreed that the drop in participation rate was being driven by a combination of short-term (“cyclical,” in econ jargon) forces — the weak economy — and long-term (“structural”) ones, primarily the aging of the baby-boom generation. But they disagreed about how big a role each factor played, which meant they also disagreed about how much participation would rebound as the labor market improved. Many economists argued that the exodus of baby boomers from the labor force was so great that participation was unlikely to rebound much, if at all.
Over the past year, however, the participation rate has experienced a clear (albeit somewhat unsteady) rise. That suggests that with unemployment falling and wages rising, more workers are coming off the sidelines and rejoining the labor force. Demographic forces mean that a more dramatic rebound is still unlikely, but 2016 showed that under the right conditions, participation can still rise as well as fall.
Lesson 3: Many people remain anxious about their economic future
Both before and after the election, there was a running debate over how much of Donald Trump’s support was fueled by economic anxiety versus how much was fueled by racism or other cultural issues. I won’t relitigate that issue here. But whatever the exact balance was between those factors, it is clear that Trump — and also Bernie Sanders — tapped into that anxiety, particularly in the industrial Midwest and other parts of the country facing long-term economic challenges.
It’s important to distinguish between economic anxiety and economic hardship. Hardship exists, of course, and millions of Americans still live in poverty, while millions more struggle to make ends meet. But seven and a half years of economic recovery have made hardship less common than it was in the depths of the recession. By pretty much any measure, the economy is getting better and has been for years.
But many Americans have good reasons to be concerned about their economic future. Many well-paid jobs, especially for people without a college degree, are vulnerable to automation or outsourcing. Retirement is much less secure than it was a generation ago. Health care is becoming more expensive. When I visited Iowa a year before the election, it was those concerns, not more immediate fears of a layoff or a pay cut, that were at the top of people’s minds. It will take more than a low unemployment rate to address those issues.
And now for the questions:
Question 1: What will Trump do?
Trump made lots of promises on the campaign trail: better trade deals, lower taxes, less regulation, a “big, beautiful” wall on the Mexican border. But he provided few specifics, and he sometimes made proposals that seemed contradictory. (It’s hard to see how we could boost military spending, preserve Social Security and Medicare, cut taxes and still, somehow, avoid increasing the deficit.)
As a result, we have little idea what Trump will actually do as president. Reading the tea leaves of Trump’s Cabinet appointments provides some hints, but there are contradictions there, too. He has appointed economist Peter Navarro, a vocal critic of free trade, to a newly created trade policy post, but he has also nominated Rex Tillerson, the head of one of the world’s largest multinational companies, to be secretary of state.
Will Trump really impose tariffs on companies that move jobs overseas, as he promised after his deal with air-conditioner manufacturer Carrier Inc. earlier this month? Will he really try to renegotiate the U.S.’s relationship with China? Will he try to reverse President Obama’s new rules on overtime pay? Will he push through a major infrastructure spending package? These questions have serious economic implications, and we don’t know the answer to any of them.
Question 2: What will the Fed do?
The Federal Reserve earlier this month raised interest rates for the first time in a year, and members indicated they expected to do so three more times in 2017. But those plans are far from certain; last December, the Fed indicated it anticipated raising rates four times in 2016, but it only ended up doing so once.
The bigger-picture question is how long the patience of Fed Chair Janet Yellen and her colleagues will last. Low unemployment and rising wages are good things, but they raise the specter of inflation, which the Fed wants to keep in check. Move too slowly or too late and the Fed could have trouble keeping inflation under control — which many conservative economists say is already happening. But move too quickly and the Fed could risk choking off economic growth just when it is beginning to reach ordinary workers.
The wild card, once again, is Trump. If he follows through on his ambitious plans to cut taxes and boost infrastructure spending, that could amp up the economy in the short term and force the Fed to become more aggressive in raising rates. But if he starts a trade war or otherwise undermines economic confidence, the Fed could find itself once again worrying about the economy slowing down, not speeding up.
Question 3: What don’t we know yet?
Is this question a cop-out? Sure. But it’s also a serious reminder that the biggest economic developments, both positive and negative, are the ones we didn’t see coming. At the end of last year, few people were predicting a Trump presidency or a British exit from the European Union. At the end of 2007, few people foresaw the economic cataclysm that was by then already beginning. And looking back over history, most of the economic events we remember — oil shocks, stock-market panics, periods of runaway inflation — were surprises at the time, even if they seem inevitable in retrospect.
Most of us who pay close attention to the economy have our own pet theories for what could go right or wrong in the coming years — I’d point to the relationship between Trump and China as an especially critical one to watch — and you can bet we’ll crow loudly if we’re proven right. But it’s important for all of us to remember just how much we still don’t know.
Finland is embarking on the world’s most ambitious experiment with giving people a guaranteed “basic income.” The New York Times’s Peter S. Goodman went to Finland to see how the program will work and what lessons it could offer for other countries, including the U.S.
The rapid advance of artificial intelligence has enabled remarkable new technologies — self-driving cars, automated personal assistants — but it also threatens millions of jobs. Steven Overly of The Washington Post looked at a new White House report that argues the government must do more to help workers whose jobs are in jeopardy.
Millions of American men in their prime working years can’t find jobs; many have been out of work for years. Andy Williams — not his full name — is one of them, and he wrote about his experiences for Vox.