Homegrown Obstacles to the Economic Recovery
David Francis

Forget Europe: Problems at home could sink the U.S. economy

For months, investors on Wall Street have been concerned that a bad turn in the European financial crisis would spill over into the United States, forcing the U.S. economy back into recession. As the euro crisis has worsened in recent weeks, the U.S. government and banks have taken steps to ensure that a downturn in Europe would not sink the slow recovery in the U.S. economy. Politicians and economists hope these preparations are adequate.

"The United States stands ready to do our part to help them resolve this issue. This is of huge importance to our own economy," President Barack Obama recently told European leaders.

There's no doubt that a turn for the worst in Europe would have negative effects here in the United States. But that isn't the only reason Americans should be concerned. Here are three internal factors that threaten to undermine our modest recovery.

Housing prices are stagnant.After a summer of modest gains in housing prices, the value of homes fell again last month. According to the Standard & Poor's/Case-Shiller index, which tracks housing prices worldwide, home prices were down in 17 out of 20 American cities, including Atlanta, Phoenix, San Francisco, and Boston. The only cities that posted gains in home prices were Washington, D.C., New York, and Portland, Ore.

Owning a home as an asset that gained value over time was once a cornerstone of American investment. But according to David M. Blitzer, chairman of the S&P's index committee, housing prices will only rise if the economy improves. "Any chance for a sustained recovery will probably need a stronger economy," Blitzer said.

The current economic downturn started with trouble in the housing market. Homeowners borrowed too much money to pay for homes, pushing housing prices higher. When these borrowers were unable to pay their mortgages, prices plummeted. Problems throughout the rest of the financial system followed.

One bright spot is that the steep drop in prices that occurred from 2007 to 2009 has stopped, Blitzer said. Price losses this year were modest. "Over the last year, home prices in most cities drifted lower. The plunging collapse of prices seen in 2007 to 2009 seems to be behind us," Blitzer said.

A recent poll of housing experts showed that most do not expect housing prices to increase until 2013. That increase still depends on improvements in the economy.

Other experts are less optimistic. According to a recent report from the Center for Responsible Lending, "As the nation struggles through the fifth year of the foreclosure crisis, there are no signs that the flood of home losses in America will recede anytime soon."

Persistent unemployment.Currently, the U.S. unemployment rate stands at 9 percent. This is down from a high of 10.1 percent in October 2009, but still well above the 4.6 percent jobless rate at the start of 2007. Unemployment might be down, but many out-of-work job seekers are no better off than they were at the start of the downturn.

What makes the unemployment figure even more disheartening is that many of the jobs that were lost are not coming back. For decades, blue-collar jobs in manufacturing were the backbone of the American workforce. Now, most of those jobs have moved to foreign shores in China and Germany. As a result, unemployed Americans have been forced to learn new skills late in their careers.

"Despite some pickup in growth in the United States during the second half of the year, the outlook is for unemployment to diminish only slowly, remaining painfully high for many years to come," Janet Yellen, vice chair of the Federal Reserve, said Wednesday.

Many people have been out of work for extended periods of time, relying on unemployment benefits to make ends meet. But it's not clear whether politicians in Washington will extend these benefits. Which leads to the final internal obstacle to U.S. recovery?

A political stalemate in Washington. Republicans and Democrats in Washington are in a political deadlock. Nothing can get done. A bipartisan panel charged with creating spending cuts in the wake of a debt downgrade has failed. Congress refuses to compromise on a number of issues, including the extension of unemployment benefits. Any measures aimed at stimulating economic growth have withered on the vine.

Republicans accuse Democrats of refusing to compromise. Democrats accuse Republicans of the same thing. It seems as if both sides are only capable of disagreement. The bad news for those looking for a job is that there is now is a sense in Washington that nothing substantial will be accomplished until after the 2012 presidential election.