Yours truly,

J. Randy Forbes

Member of Congress

The Current State of Our Economy

Are We in a Recession?

After the past few months, we have heard the term “recession” used more frequently in terms of the economic situation in America. We hear differing reports that we are headed into a recession, that we are already in a recession, or that we’re not even close to a recession. So what is a recession, really, and who decides when we are in one?

When the term “recession” is heard in public conversation or in the media, it is usually being used loosely to describe a weakness in one major sector of the economy, like the housing market or the job market. “Recession” in that sense means that some citizen-group is feeling turmoil, whether it is homeowners or job-seekers. However, when economists use the term “recession,” it is used under more specific and consistent parameters..

The National Bureau of Economic Research, the committee who analyzes the economy and determines when a recession starts and stops, abides by the following definition in determining when we are in a recession: 

“A recession is a significant decline in economic activity spread across the country, lasting more than a few months, normally visible in real GDP [Gross Domestic Product], real income, employment, industrial production, and wholesale-retail sales.  A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough [end of a business cycle]. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.” – The National Bureau of Economic Research 

The NBER uses GDP as its most important indicator of a recession. However, because of the time lag in collecting accurate GDP data, the NBER also uses indicators such as personal income, industrial production, and employment, which is often why the term “recession” is used in relation to weaknesses in these sectors. The most important distinction the NBER makes about a recession is that it is a period of declining output, not just a period of slow economic growth. 

“The economy may be headed for – or already in – a recession.”

We hear this statement often, and it can sometimes be confusing as to why no one can say if we really are in a recession or not. Because it takes time to determine data trends in GDP, real income, employment, industrial production, and other factors, it takes time for the NBER committee to wait for the data to shake out before they can determine if we are in a recession. In fact, we often don’t know that we were in a recession until sometimes a year after the recession began. 

Although we hear differing reports from individuals on whether we are in a recession now or not, the NBER has not officially declared the economy is currently in a recession. 

Source: “What is a Recession, Who Decides When it Starts, and When do They Decide?”, The Congressional Research Service, January 23, 2008.

What are some factors that are shaping the current economic slowdown?

Unemployment

Unemployed individuals are classified generally by two criteria: 1) they must have no job, and 2) they must be actively seeking employment. The unemployment rate directly impacts economic growth, because employment determines the potential of output a nation has. When there is a lack of ability to employ individuals to produce goods and services, economic growth slows.

According to the U.S. Bureau of Labor Statistics (BLS), the employment rate in the U.S. was 5% in April 2008, down from 5.1% March 2008. The following graph from the BLS shows a history of unemployment in the U.S.

Housing Market

According to the Congressional Research Service, housing cycles usually do not have a lasting impact on the economy because markets naturally adjust themselves. However, in the short term, activity in the housing market could lead to a slowdown in aggregate spending, especially if other sectors are weak.

Quickly falling house prices in the U.S are impacting the overall housing market.  According to U.S. News & World Report, the median price of a new home is at $206,500, receding to where it was in November of 2003. Much of the drop in housing prices can be attributed to the increase in home foreclosures as a result of the subprime mortgage situation. Similar to the 2000-2001 recession when subprime foreclosures increased, there has been an upward trend in the number of subprime foreclosures since 2005.

Because consumers realize that the investment they have made in their home is decreasing, they begin to be more cautious about spending, and they begin save more. As a result, consumer spending in the U.S. economy drops and the economy slows down.

More Information: Read Randy’s Primer on the Housing Market

Energy and Gas Prices

In just five short years, gas prices have soared from just over a dollar per gallon to a national average of $3.47 per gallon as of April 18th. Rising energy costs have an impact on multiple areas, and perhaps the most personally painful aspect of the rising gas prices is the way that it is impacting individual disposable income. But it also impacts other sectors of the economy.

Energy costs impact farming, which, as we’ve seen in recent weeks, in turn impacts food prices. Pain at the pump is felt by farmers who use fuel to fertilize, water, and harvest their crops. Manufacturing plants, who must prepare and package the food for mass consumption, rely on fuel to operate. Retailers rely on fuel to transport food products to the grocery store. Rising gas prices over the past few years have spurred an increased demand for commodities such as corn and other crops that are used to produce ethanol, an alternative fuel championed as a way to offset rising gas prices.

Energy costs impact tourism. Increased travel costs have made normal travel difficult, and the overall tourism industry is suffering. A decline in tourism means small cities and towns who depend on tourism to fuel their economies are suffering economically.

Energy costs impact manufacturers. In order to make up for the increased amount spent on energy, manufacturers must pass on costs to consumers and even sometimes lower the amount they are paying workers for their labor. This drives the cost of products up and strains our economy.

More Information: Read Randy’s Primers on Energy Prices and Gas Prices

As a result of factors like rising energy prices, a slumping housing market, and rising unemployment rates, our economy has taken a significant hit, regardless of whether economists say we are in a technical recession or not. While all individuals may not directly be impacted by unemployment, or the housing market, or even energy prices, the indirect impact is felt in some way by most American families. Food prices have increased, which impacts families’ bottom lines. Credit lenders have been more selective in the credit line they provide, which impacts first time homebuyers or college students seeking tuition aid. The following are just a few ways in which American families are impacted by the weakening economy, and ways in which I am working in Congress to address some of these issues.

Food Prices

As food prices increase, families must adjust their budget. U.S. food prices rose 4% in 2007, the largest annual jump since 1990, and they are expected to gain 3.5 to 4.5% in 2008. While each of us feels the impact of these rising costs on our budgets, low income families feel the impact especially. On average, U.S. households spend just over 12 percent of their income on food. Low income families spent over 17 percent, so when food prices rise, low income families feel the pinch even more because food expenditures make up a greater part of their budgets.

üLast year’s Farm Bill, a multiyear piece of legislation that I supported, significantly strengthens our farmers and our domestic production – in a world where global consumption is increasing and food safety is becoming a potential national security concern, we must be making responsible decisions like this that have a positive, long-term impact on our economy.

To read more about my work on agricultural issues, visit: http://forbes.house.gov/issues/agriculture.htm

Cost of College

According to the House of Representatives Committee on Education and Labor, college costs have grown nearly 40% in the last five years. Because of this, many qualified students have delayed going to college or have decided not to attend at all because they do not think they have the means to pay for their education. Because credit lenders are tightening the credit they will offer, many students are not able to receive the aid they need to attend school. An educated workforce allows us to remain competitive into the next generation, and with out it we lose power in our economy.

üJust this month, I voted to increase access to student loans. H.R. 5715, the Ensuring Continued Access to Student Loans Act of 2008, will increase students’ access to financial resources by increasing the amount of unsubsidized federal loans a student may be eligible to receive. The bill would raise borrowing limits by $2,000 and would prevent students from being penalized if their parents are struggling with their home mortgage or medical bills for less than six months. I have also cosponsored H.R. 2588, the Comprehensive Coverdell Modernization Act, which strengthens Coverdell education savings accounts as an option for families’ long-term financial planning for educational expenses by accounting for the growing rate of inflation and increased tuition costs.

To read more about my work on the cost of higher education, visit: http://www.house.gov/forbes/newsroom/enewsletter/2008/04252008.htm

Gas Prices

Just in the past two weeks, we've seen an increase of 15 cents per gallon. Industry analysts report that the trend in rising gas prices will not subside soon.  In fact, they say that we could see gas prices rise as much as 30 more cents per gallon over the next few weeks. We’ve already seen the impact it has made on our food industry and on the retail industry, and the problem has the potential to worsen as gas prices continue to rise.

üI cosponsored H.R. 2927, which would increase the corporate average fuel economy standards for automobiles and promote the domestic development and production of advanced technology vehicles. This legislation would increase fleet-wide corporate average fuel economy (CAFE) standards for non-passenger and passenger automobiles to between 32 and 35 miles per gallon by 2020, and would establish separate standards for cars and light trucks. It also would establish an account to fund domestic commercialization and production of advanced technology vehicles and vehicle components and extend provisions providing manufacturing incentives for alternative fuel automobiles for 10 years.  I have also called for a Manhattan Project-style commission of the best and brightest scientists and researchers to develop a viable energy plan that will permanently address the issue of rising gas prices and set us on a path towards energy independence.

To read more about my work on gas prices, visit: http://www.house.gov/forbes/newsroom/editorials/2008/gaspricesprimer.htm

Health Care

With non-discretionary items like food and gasoline prices increasing everyday, many individuals are finding it even more difficult to pay for health care costs that are already high. Many senior citizens who rely on monthly prescription drugs are forced to make choices between driving or paying for necessary medicine.

üTo make insurance more affordable for individuals, I have cosponsored the Health Insurance Affordability Act of 2007, which would make health savings accounts a more affordable option by allowing consumers a tax deduction for the cost of the high-deductible health insurance plan. Additionally, to encourage modernization of our health care system, I have introduced the Enhancing SIMULATION Act of 2007, which increases the use of medical modeling and simulation across the United States and helps improve the quality of health care by reducing medical error and cutting costs.

To read more about my work on health care issues, visit: http://forbes.house.gov/issues/healthcare.htm

Individual Savings & Financial Literacy

In the past ten years, the individual household savings rate in America has fallen drastically to the lowest it has been since the Great Depression. In 2005, the household savings rate fell below zero and, for the first time in recorded American history, has consistently declined since that point. This means that Americans have not only spent their after-tax income, but they have increased the amount that they borrow. Our savings rate as a direct impact on our economy. When we increase our domestic savings, we will see an increase in U.S. investments and a reduction in U.S. dependence on foreign resources to finance domestic investment. The impact of this would mean that more goods and services would be produced within our nation’s borders, leaving a larger share of income for Americans and creating long-term economic benefits. Unfortunately, current economic situations are not making it any easier for Americans to save.

üI have supported H.R. 1514, The Savings for Working Families Act, which would provide tax credits to financial institutions that match the savings of low-income families. H.R. 1514 would also provide $20 million for financial literacy and education for the savers by nonprofits. In addition, I have supported America Saves Week to encourage individual savings by offering helpful resources for organizations and individuals who are looking to test their savings knowledge, to take action on saving more effectively, or to find information on various financial situations from dealing with credit card debt, to planning for retirement, to preparing for emergencies. 

To read more about my work on savings and consumer issues visit: http://forbes.house.gov/issues/taxes.htm and http://forbes.house.gov/issues/technology.htm

Achieving Long Term Economic Stability

Real economic growth comes from generating income and wealth for American families, and income and wealth come from increasing commerce and growing jobs. The following steps will put us on a path towards long-term economic growth and stability.

Reduce Tax Burden on Families

Restoring predictability in our economy means that we need to seek permanent tax reform that will put more money in the wallets of hardworking Americans on a regular basis.

• Make tax relief permanent for middle-class married couples, parents and workers.
• Offset payroll taxes so Americans increase their regular take-home pay.
• Increase the tax allowance for children to help working families and single-parent homes make ends meet.
• Repeal the death tax and capital gains tax to encourage long-term investments.
• Provide more predictability with our tax laws, and avoid the stop-and-start tax policy that has been so prevalent in recent years.

Encourage Savings

While the economy was growing in the 1990s, household savings fell dramatically. According to a report by the Congressional Research Service, since that point household savings has steadily declined and the proportion of income that households have set aside has been near or below zero. The U.S. savings rate is now the lowest it has ever been.

• Encourage savings and investing by reducing the capital gains tax.
• Promote financial literacy education to our young generation.
• Protect the value of the dollar so that Americans will feel confident in investing and saving their money.

Reject Overregulation and Job-Killing Small Business Taxes

We need to put business back in the hands of America’s entrepreneurs.

• Reduce unnecessary regulations on businesses so we can increase our global competitiveness.
• Cut small business income taxes to encourage the creation of more jobs.
• Reduce the cost of health insurance to individuals and employers by creating more options, like health savings accounts and associated health plans.
• Allow for faster expensing of all new business equipment to encourage productivity and job growth.
• Allow for accelerated depreciation to encourage investment.

For More Information…

The following economy resources are available on my Web site.

▪ For detailed information on legislation I have cosponsored in Congress on the economy, please visit http://randyforbes.house.gov/issues/taxes.htm.

▪  To read an editorial on the economic stimulus package, visit http://www.house.gov/forbes/newsroom/enewsletter/2008/01142008.htm

▪ To read an editorial on food prices, visit http://www.house.gov/forbes/newsroom/enewsletter/2008/05022008.htm

▪ To read a primers on the following topics, visit:

• Gas Prices Primer
• Energy Primer
• Mortgage Primer

▪ Do you have a solution to address one of our economic issues? Share your idea at the Solutions Lab.

I would appreciate hearing your thoughts on the economy or any other issue of concern to you. Please take a moment to Email me via my website, or call my Washington, D.C. office at (202) 225-6365.