How We’re Doing as Debt Fears Rise

Index #4: Last Five Quarters

With the worst of the credit crunch of 2008-09 behind us, U.S. economic activity has been improving since last summer. Greece’s recent fiscal problems, however, have sparked serious concerns about global credit markets. A central lesson of the financial crisis is that disruptions in credit markets can damage the broader economy. In the fourth “How We’re Doing” Index, a team of scholars at the Brookings Institution has looked at the past five quarters to determine where U.S. credit markets stand and what strains may arise from long-term fiscal imbalances.<not-mobile message=””>  Continue reading below chart » </not-mobile>

Related Materials:
» Index #1: A Composite Index of Global and National Trends »
» Index #2: What’s Blocking the Recovery? »
» Index #3: How We’re Doing in the World »

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“General Welfare”

2009 Q1

2009 Q2

2009 Q3

2009 Q4

2010 Q1

GDP growth, annualized percent change -6.4 -0.7 2.2 5.6 3.2
Unemployment rate 8.2 9.3 9.7 10.0 9.7
Unemployment rates abroad
Greece 9.3 8.8 9.2 10.2 11.7
Spain 16.6 17.9 18.7 19.0 19.0
Portugal 8.7 9.5 10.1 10.2 10.4
Payroll employment in the D.C. metro area, percent change -0.6 -0.4 -0.7 0.0 0.7
Payroll employment in the Las Vegas metro area, percent change -3.4 -2.8 -1.4 -0.6 -1.1
Payroll employment in the Cleveland metro area, percent change -2.0 -1.9 -0.8 -0.5 -0.7
Inflation rate -2.2 1.9 3.7 2.6 1.5
Consumer spending, annualized percent change 0.6 -0.9 2.8 1.6 3.6
Interest rate on 30-year fixed mortgage (end of quarter) 5.00 5.42 5.06 4.93 4.97
Home prices in 20 large metro areas, annualized percent change -20.9 -9.5 8.8 3.4 2.1
Dow Jones Industrial Average (end of quarter) 7,609 8,447 9,712 10,428 10,857
Yield on investment grade bonds (end of quarter) 8.42 7.50 6.31 6.37 6.27
Interest rate on 10-year U.S. Treasuries (end of quarter) 2.82 3.72 3.40 3.59 3.73
10-year government bond rates abroad (end of quarter)
Greece 5.87 5.33 4.56 5.49 6.24
Spain 4.06 4.25 3.81 3.81 3.83
Portugal 4.68 4.50 3.94 3.91 4.31
FDIC bank failures 21 24 50 45 41
Banks tightening standards for commercial and industrial loans to small firms, net percent (end of quarter) 42.3 34.0 16.1 3.7 0.0
Outstanding consumer credit, annualized percent change -3.9 -4.8 -3.1 -6.1 -0.4

“Common Defense”

2009 Q1

2009 Q2

2009 Q3

2009 Q4

2010 Q1

U.S. combat fatalities in Iraq and Afghanistan 83 101 158 76 79
Percentage of Americans who believe the war in Afghanistan has been worth fighting (Washington Post-ABC News polling) 56 51 47 48 45

“Blessings of Liberty”

2009 Q1

2009 Q2

2009 Q3

2009 Q4

2010 Q1

Approval rating of the presidency, percent 63 63 54 51 49
Approval rating of the Congress, percent 30 35 31 24 19
Difference between Republican and Democratic approval ratings for the presidency, percent 60 63 69 67


See data sources »

The availability of credit to American households and businesses is uneven, mirroring broad economic conditions. Many sound large firms can find funding cheaply through the corporate bond market. Likewise, families that meet certain standards can obtain low-rate mortgages. But many high-risk homebuyers can no longer find inexpensive mortgage financing, and small businesses are still struggling to obtain credit.

The policy response to the Great Recession — while reducing some risks to credit markets — has created new problems. The loss of household wealth, income and credit was partially replaced with a substantial increase in government borrowing to mitigate the drop in demand for goods and services. The U.S. debt held by the public has risen to 53 percent of gross domestic product and is projected to reach 67 percent by 2020. Further, the increase in the Federal Reserve’s balance sheet from $0.9 trillion at the end of 2007 to $2.4 trillion has led some analysts to worry about inflationary pressures.

Emerging concerns about sovereign debt default present a barrier to global economic growth. Greece’s near-default has sharply raised the cost of its government debt and triggered fear that the contagion will spread to other eurozone countries such as Portugal and, to a lesser extent, Spain.

The good news is that Greece’s fiscal situation differs importantly from that of the United States. Greece has higher debt and a larger deficit relative to its GDP and a lack of competitiveness stemming in part from high labor costs. Greece cannot compensate for its competitiveness problem by adjusting its exchange rate because it uses the euro. Its government has embarked on a difficult fiscal austerity program, but results — aided by foreign support on realistic terms and, ideally, a stronger world economy — will take a while.

In contrast, U.S. competitiveness remains relatively high. Although the U.S. debt-to-GDP ratio is increasing, it remains well below that of Greece (86 percent as of last year). The U.S. dollar is in high demand, and if anything, concerns about sovereign debt elsewhere have increased demand for U.S. Treasury securities, thereby holding our borrowing costs down.

Even if the massive policy response to Greece succeeds in stabilizing world financial markets, there are longer-term implications of rising U.S. public indebtedness. The textbook concern is that it eventually leads to higher interest rates, which will lower capital formation and productivity, ultimately reducing economic wealth. But the financial crisis of the past two years provides further lessons. First, the government must be prepared to step in when private demand for goods and services deteriorates, but significant long-term debt will constrain the U.S. government’s ability to respond to an economic crisis if required. Second, in the highly interconnected global economy, markets can respond suddenly and punitively to highly leveraged institutions. Financial markets in 2008 witnessed an abrupt loss in investor confidence, triggering runs on such financial institutions (remember Lehman Brothers?).

The U.S. government provided — and should continue to provide — critical short-term support for the still-recovering domestic economy. But to reduce the chances of future economic crises, we urgently need to show a convincing commitment to longer-term fiscal strength.

See also:
» State of Metropolitan America—portraying the demographic and social trends that shape our nation’s metropolitan areas
» GovWatch—tracking the progress and performance of our institutions in economic recovery
» MetroMonitor—a barometer of the health of America’s 100 largest metropolitan economies


GDP growth:
U.S. Bureau of Economic Analysis, NIPA Table 1.1.1. May 2010.

Unemployment rate:
U.S. Bureau of Labor Statistics, Current Population Survey Unemployment Data.

Greek unemployment rate:
Hellenic Statistical Authority, Monthly Labour Force Statistics.

Spanish and Portuguese unemployment rate:
Eurostat, Labour Force Survey.

Payroll employment in the D.C. and Las Vegas metro areas:
U.S. Bureau of Labor Statistics, State and Metro Area Employment Statistics.

Inflation rate:
Bureau of Labor Statistics, Consumer Price Index, All Urban Consumers, Seasonally Adjusted.

Consumer spending:
U.S. Bureau of Economic Analysis, NIPA Table 2.3.1.

Interest rate on 30-year fixed rate mortgage:
Freddie Mac, Primary Mortgage Market Survey, “Monthly Average Commitment Rate and Points on 30-year Fixed Rate Mortgages since 1971.”

Dow Jones Industrial Average:
Yahoo Finance. DJIA Historical Prices. April, 2010.

Yield on investment grade bonds:
Federal Reserve Statistical Release H.15. Selected Interest Rates.

Interest rate on 10-year Treasuries:
Federal Reserve Statistical Release H.15. Selected Interest Rates.

Interest rate on 10-year government bonds in Greece, Spain, and Portugal:
European Central Bank Statistical data warehouse. Long-term interest rate statistics for EU member states.

FDIC Bank Failures:
Federal Deposit Insurance Corporation. Failed Bank List.

Banks tightening standards for commercial and industrial loans to small firms:
Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices.

Outstanding consumer credit:
Federal Reserve Statistical Release G.19. Consumer Credit.

U.S. War Fatalities:
Department of Defense.

Percentage of Americans who believe the war in Afghanistan has been worth fighting:
Washington Post-ABC News Poll: May 2010.

Approval rating of the presidency (and difference between Democrats and Republicans):
The Gallup Organization. “Presidential Approval Ratings – Barack Obama.” Retrieved 1 May 2010 from The Gallup Poll website.

Approval rating of Congress:
The Gallup Organization. “Congress and the Public.” Retrieved 1 May 2010, from The Gallup Poll.