The Biggest Problem with the US Economy Today is…..

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For the commercial real estate industry, important economic metrics which impact the market’s underlying fundamentals, include GDP growth and job creation. While both of these metrics have been trending positively, they have not been performing at the level economic text books would predict based upon the magnitude of the Great Recession. Those books teach that economic cycles typically act like a rubber band. The more they are stretched in one direction, the more they should correct in the opposite direction.

Given the severity of the recession, predictions of annual GDP growth of 6 percent to 7 percent were common and estimates of job growth of at least several hundred thousand jobs per month were being equally tendered. Our recovery has been much more modest. But even with these less than thrilling improvements, the commercial real estate market, particularly in gateway cities, has recovered extraordinarily well. If you have read some of my recent columns, you know that I believe 2014 was, by far, the best year for investment sales in the 31 years I have been an active broker. Leasing data is very positive and expectations are that 2015 should be an excellent year for rental growth in all sectors, office, retail and residential.

SEE ALSO: New York Is Headed for a Medical Office Leasing Boom

But for many in this country the Great Recession has not ended. The biggest problem in the US economy is that real median incomes (income levels adjusted for inflation) are lower today than they were in 1999. This is important because it addresses the purchasing power of money which, after all, is all most folks care about when it comes to money. For example, would you rather have $50 or $100? The answer is: It “depends”. All things being equal, one would rather the $100 but it depends upon when you have the sum and what you can purchase with it at a particular time. If today, $50 purchases 5 bags of groceries at the market and tomorrow $100 purchases 4 bags of groceries, one would prefer the $50.

Real median income in the US hit a peak in 1999 at about $57,000. By 2002, it had fallen to about $55,000. At the peak of the economic cycle in 2007, RMI was up to $56,500 and has been steadily declining since then. In 2008, it had fallen to $54,400 and by 2013 had dropped to just $51,900. The 2014 data will not be released until December of this year. The ramifications of this trend are significant.

There is much talk today about income inequality. The most well off among us seem to be doing extremely well while the average American is able to purchase fewer goods and services, on a relative basis, today than they were able to in 1999. Technology is eliminating many unskilled jobs (while also greatly increasing the productivity of skilled labor) causing an oversupply of workers. This oversupply exerts downward pressure on wages. Many elected officials endorse an increase in the minimum wage to help offset this dynamic. Whether you believe this is a good idea or not (there are major philosophical differences on this issue), to the extent wages are increased too much, employers will create and utilize new technologies to eliminate more positions to the extent possible. Some national food chains have recently replaced waiters and waitresses with IPads and a limited number of servers to bring food to the table. This dynamic is pulling down wage growth. It has also pushed discouraged workers to leave the job market all-together resulting in the lowest participation rate in decades at about 64 percent.

A key to solving this income stagnation is education. Increasingly, the jobs of tomorrow will be reliant on workers will better skill sets. The US has done a very poor job of educating our youth even though we spend more money on education per capita than any other country on earth. Increasing teacher salaries and making it easier to fire underperforming teachers would be a good start towards making this happen. Improving our education system would lead to better wages and better GDP growth resulting in a more robust economy for all of us. Let’s hope our elected officials make this a priority.