By Harry M. Davis
N.C. Bankers Association
The deficit reduction agreement worked out in Washington will do very little to reduce the deficit. The economy is growing much slower than the figure used in the budget projections. As a result the deficit will be $4 trillion larger over the next 10 years than the original estimate used in the negotiations, which called for cuts of just $2.5 trillion.
The change in the credit rating for U. S. securities by Standard & Poorís is not very important. As the rating change was announced, the world was buying Treasuries, pushing down interest rates to near record lows. The anemic rate of growth in the U.S. economy is much more important to yields than the credit rating change.
The economy has now been in recovery for eight consecutive quarters through the second quarter of this year. Unfortunately, the rate of economic growth is anemic compared to the post WWII average. GDP growth in the second quarter was less than the consensus forecast at a rate of only 1.3 percent. The first-quarter number was revised from 1.9 percent to only .4 percent. Year over year GDP has grown only 1.6 percent.
The employment picture is dismal. About 9 million jobs were lost in the ěGreat Recession,î and only 2.42 million jobs have been created in the recovery, which is small compared to other recoveries. The economy has added an average of 132,000 a month this year, which is considerably less than the 200,000 a month needed to reduce the unemployment rate. Federal, state and local governments are all cutting jobs, which will continue for the remainder of the year.
Larger debt levels of households and all levels of government make strong economic growth less likely after each recession. Consumers and governments are trying to lower debt/spending levels, which constrains spending. The consumer confidence index is lower today than it was in February.
The housing sector continues to take its lumps. Renting rather than ownership is now preferred. In the last 12 months, the rise in occupied housing units is more than 800,000. For the period, there are 1.4 million more rentals while the number of owner occupied homes dropped 600,000. The homeownership rate peaked in 2004 at 69.2 percent and is now 65.9 percent and falling.
The Federal Reserve (FED) ended QE2 in June wherein it added $684 billion in funds to banks. Such activity is supposed to increase economic growth. Unfortunately, only $326 billion in new money was created. Due to much tighter restrictions from the regulators on banks and the lack of customers interested in taking on loans, the money has had very little impact on the economy. The FED is pushing on a string.
The state unemployment rate rose in June to 9.9 percent from 9.7 percent in May. The government sector has lost 31,600 jobs over the year while the private sector has only added 28,900. The constraints on state spending will continue to hurt the state economy well into next year.
GDP growth for the year will be about 2.5 percent. That rate is too slow to help either the deficit picture or employment. Housing prices and sales, particularly expensive homes, will not recover for several more years.
The federal government must cut regulations across the board, create a more favorable tax environment for businesses and increase infrastructure spending. The government should be doing much more to help the business sector which will create the jobs that are desperately needed.

Dr. Harry M. Davis is an economist with the North Carolina Bankers Association and professor of banking at Appalachian State University.