The U.S. economy has displayed a remarkable resilience
following the 2001 recession. The economic slowdown of late 2000
that turned into a fully developed recession in early 2001 worsened
with the terrorist attacks and corporate scandals late in the
This economic "perfect storm" produced a sluggish economy that
many experts, including Federal Reserve Chairman Alan Greenspan,
expected to remain sluggish or to worsen in 2002 and 2003. Instead,
the economy burst out of its post-recession doldrums to record some
of the best economic numbers of recent memory. Indeed, so robust
has the economy been since the middle of 2003 that Chairman
Greenspan, in his own understated fashion, paid the economy
high praise by calling it "resilient."
The effectiveness of U.S. policies since 2001 is behind some of
this resilience and led to the shallowest recession in modern
American history. Today, business investment continues on an
unprecedented expansion, and more Americans are working than
ever before. Still, myths of economic weakness are rampant, driven
by political hype about outsourcing, deficits, and oil prices.
Challenges remain for the next President, but the fundamental
strength of the economy has kept America prosperous and offers the
best promise for continuing growth in the years ahead. This paper
presents a basic statistical overview of the American economy
and prosperity that Americans enjoy today.
Jobs, Employment, and Income
Three main indicators inform the issue of employment in America:
the overall growth in the number of people employed, the
unemployment rate, and labor compensation. Naturally, a
net increase in employment is seen as progress, but this statistic
is sensitive to population and uninformative about willingness
to work. Instead, economists have long believed that the key
measure of employment is the percentage of people who are
employed out of the entire population of potential workers.
However, many people simply do not want to work in the formal
labor force, either because they are studying for advanced degrees,
are retired, or are caring for other matters in the home.
Thus, the unemployment rate is the best way to assess economic
health. Another useful indicator is labor compensation, which for
many observers represents the quality of jobs.
Jobs: Payroll or Household? The government provides many
measures of job creation, but the two best known are the payroll
survey from the Bureau of Labor Statistics (BLS) and the household
survey from the Bureau of the Census. As widely reported, the two
surveys are telling different stories:
Since January 2001, when President George W. Bush was sworn
in, payroll jobs have declined by millions and recovered by
millions, but still remain 700,000 below their peak, even after
factoring in a recent benchmark revision.
On the other hand, the household survey reports a record high
level of working Americans in 2004, with 1.8 million more jobs
since January 2001.
Yet both surveys may be correct because they count jobs
differently. Their counts are different in part because the
household survey counts all jobs--not just payroll jobs--including
a growing but hard-to-define class of new economy workers who are
not on payrolls, such as part-time consultants, eBay
entrepreneurs, and real estate agents.
In contrast, the payroll survey's name says it all. While
payrolls provide a much larger sample size, this does not guarantee
accuracy. In August, the BLS acknowledged that the survey has
sample problems: It counts workers twice when they change jobs,
which the BLS estimates accounts for about 250,000 of the
difference that has opened up between the two surveys since 2001.
Moreover, this BLS analysis may be conservative: A Heritage
Foundation analysis estimates that this flaw may result in an
undercount of as many as 1 million jobs.
Unemployment and the Recession.
Unemployment, a lagging indicator, remained mild throughout
and after the 2001 recession, peaking at 6.3 percent. In contrast,
unemployment peaked at 7.8 percent after the 1990 recession,
and unemployment peaked at 10.8 percent after the 1980
After the 1990 recession, unemployment exceeded 6.3 percent
(the peak rate after the 2001 recession) for 40 consecutive
The peak unemployment rate after the 2001 recession (6.3
percent) is lower than the average unemployment rate for the
1980s and less than one point higher than the average
unemployment rate for the 1990s.
Unemployment and Discouraged Workers. The unemployment rate is
the preeminent measure of the intensity of labor demand. When the
rate dips below what economists consider the "full-employment"
rate of 5 percent to 5.5 percent, the labor market is likely
overheating, driving up inflation.
Over the past year, the unemployment rate has dropped in every
region of the country and in 45 states. Moreover, non-farm payroll
employment has increased in 47 states over the past year.
Still, some critics contend that the current low rate of 5.4
percent is a mirage because it neglects to include all the
discouraged workers. The problem with this argument is that the BLS
counts discouraged workers and even publishes an alternative
"underemployment rate" called U-4, which is barely higher than the
official rate. There are no more discouraged workers today than
there were in the mid-1990s.
Labor Force Participation. The fallback critique is that
labor force participation has declined from a peak of 67.2 percent
in January 2001. That is true, but most of the decline was due to
9/11, not the recession. Labor force participation was 66.8 percent
in October 2001, then 66.0 percent in August 2004. Analysts need to
consider the reality that labor supply has changed, not just
Two other points shed light on participation:
First, the participation rate of women age 20 and above is the
same today as it was in 1997 and higher than every year before
Second, the decline in total participation rates since 2001 is
driven largely by the unprecedented drop-off in teenagers ages
16-19 who are willing to work, from 52 percent in 2000 to 43
percent in 2004.
Initial unemployment insurance claims for October 14, 2004,
were at 354,000, and the four-week moving average was
The 25-year average of initial claims is 380,520.
The Wall Street rule of thumb is that any level of claims
below 400,000 signifies labor market strength.
Real Earnings and Income. Worker pay is a sign of job
quality. The Labor Department's measure of real hourly
earnings is one of many pay statistics and includes all
monetary compensation. However, it excludes benefits and, unlike
other measures, only counts earnings for non-executive workers.
During the 1980 and 1990 recessions, real hourly earnings
However, during and after the 2001 recession, real earnings
increased--by 2 percent since the recession began in March
Real earnings are higher now than they were at the height of
the dot-com boom in 2000.
Personal income is also growing. In the second quarter of
2004, personal income increased more quickly than during any other
quarter of the past three years.
Manufacturing. Jobs in manufacturing are on the decline
worldwide as a result of new technology, increasing productivity,
and strong competition.
From 1995 to 2002, worldwide manufacturing employment declined
11 percent, which matches the decline of manufacturing
employment in the United States over that period.
Even in China, employment in the manufacturing sector has
fallen--by 15 percent from 1995 to 2002.
Nevertheless, manufacturing in the United States has rebounded
strongly of late. Production is rising quickly. As measured by
the Department of Commerce, manufacturing sales grew at a 6.1
percent annual rate in the second quarter of 2004, which followed a
6.6 percent annual rate of growth in the first quarter.
Manufacturing employment reversed its decline in February 2004
and has since added 70,000 payroll jobs.
Overall, the manufacturing sector has expanded for 16
consecutive months, through September 2004.
Real gross domestic product (GDP) grew at a 3.3 percent annual
rate in the second quarter of 2004, following a high 4.5 percent
growth rate in the first quarter.
In 2003, GDP grew by 4.4 percent.
The average growth rate during the 1990s was 3.26 percent,
just under the last quarter's rate of growth and well below the
growth rate for 2004 so far.
Tax Cuts and Business Investment. The 2003 tax cuts reduced
taxes on business investment. When businesses invest in facilities,
equipment, computers, software, and other inputs, they both
demonstrate their belief that future growth will be strong and
create the preconditions for economic expansion and job
Business investment contracted at a 1.14 percent
annualized rate over the 14 quarters prior to the 2003 tax
Business investment grew at a 13.03 percent annualized rate
over the three quarters following the 2003 tax cuts.
Outsourcing and Insourcing
The Uninsured. According to the U.S. Bureau of the
Census, 44.9 million Americans went without health insurance
for some part of 2003.
The typical family that loses coverage is uninsured for
Only 3.3 percent of all Americans went without some kind
of health insurance for four or more years.
In 1996, some 8.8 percent went without health insurance for
the entire year. This figure dropped to 8.0 percent by 1999.
In 1996, 78.2 percent of all Americans had health insurance
for the entire year. By 1999, the rate had risen to 80.4 percent.
Medicaid enrollment has grown in recent years, but the Census
Bureau's survey of the uninsured undercounts Medicare enrollment by
18 million, compared to figures from the Centers for Medicare and
Health Savings Accounts. Health Savings Accounts (HSAs)
were enacted as part of the Medicare Modernization Act of 2003
and took effect on January 1, 2004.
The majority of HSA enrollees pay between $51 and $100 per
month for coverage--far less than other types of individual
insurance would cost.
Early experience shows major cost savings for small
businesses. Some small businesses have been able to cut their
health coverage expenditures by 20 percent using HSAs while
holding employee out-of-pocket expenses steady and actually
improving the level of care.
The 2001 Recession.
The poverty rate for 2003 was 12.5 percent, which is higher
than for recent years but still better than the poverty rate
for 1998 of 12.7 percent and the poverty rates of the previous 15
Poverty always rises with recessions, but the increase in
poverty stemming from the most recent recession was about half the
increase of each of the previous two recessions.
In previous recessions, child poverty increased significantly,
but during the most recent recession, it increased only
slightly. The 1980 recession caused a 5.5 percentage point
jump in child poverty, and the 1990 recession caused a 2.7
percentage point jump, but the 2001 recession caused only a
1.6 percentage point increase in child poverty.
Poverty in America.
More than half of all poverty "spells" (time spent in poverty)
last less than four months, and about 80 percent last less than a
Very few people--only about 2 percent of the total
population--are chronically poor in America, as defined by living
in poverty for four years or more.
About 13 percent of poor families and 2.6 percent of poor
children experience hunger at some point during the year. In most
cases, their hunger is short-term; 89 percent of the poor report
that their families have "enough" food to eat, while only 2 percent
say they "often" do not have enough to eat.
About 38 percent of all households in the lowest income
quintile (that is, the bottom 20 percent of earners) rose to a
higher quintile within three years. An almost equal percentage
(34 percent) of all households in the top quintile fell within
According to the uncorrected Census numbers, the top 20
percent of earners (top quintile) earned $14.20 of income for every
$1 of income earned by the bottom 20 percent.
However, the Census figures do not account for benefits
provided by employers and the government, taxes, differing
household sizes among the quintiles, and differing work habits
among the quintiles.
After accounting for benefits and taxes, the income ratio
between the top and bottom quintiles drops to $8.56 for every $1.
After also accounting for household sizes, the income ratio
between the top and bottom quintiles drops to $4.21 for every $1.
Finally, accounting for hours worked (i.e., assuming that all
non-elderly adults work equal amounts) reduces the income ratio
between the top and bottom quintiles to $2.91 for every $1.
Poverty and Taxation.
Households in the top income quintile provide one-third of all
labor in the economy.
Households in the top income quintile pay 82.5 percent of
total federal income taxes and two-thirds of federal taxes
Households in the bottom income quintile pay 1.1 percent of
total federal taxes.
Nearly 40 million tax filers--about one-third of the
total--pay no income taxes. Nearly all of these zero-tax filers are
low-income individuals and families. Many of them actually
receive money for filing taxes through the child tax credit or the
earned income tax credit.
The Tax Cuts
The economy has added more than 1.5 million payroll jobs over
the past year and nearly 2 million jobs on the household survey.
Most indicators point toward continued growth. Output is
booming, the manufacturing outlook is positive, business
confidence is high, and productivity continues to set records.
Even such favorites among economic
pessimists like data on long-term unemployment, manufacturing
employment, and worker discouragement are showing marked
improvement--in addition to which the poverty rate is low by
historical standards. Unfortunately for the pessimists,
these are the facts that frame the debate on the economy today.
Tim Kane, Ph.D.,
is Research Fellow in Macroeconomics in the Center for Data
Analysis, Andrew Grossman is Senior Web Writer and Editor, Rea S. Hederman,
Jr., is Manager of Operations and a Senior Policy Analyst in
the Center for Data Analysis, and Kirk A. Johnson, Ph.D., is
Senior Policy Analyst in the Center for Data Analysis at The
Payroll employment, as measured by the Current
Employment Statistics survey from the BLS, peaked in March 2001 at
132,507,000 and reached its recent low in August 2003 at
129,789,000. Since then, the payroll survey has rebounded, hitting
131,567,000 in September 2004 after 13 straight months of gains.
Additionally, the BLS announced that payroll numbers from March
2004 and on will be revised upward by an estimated 236,000 along
with January 2005 data. Factoring in this change, payrolls are
only 704,000 off their peak. See U.S. Department of Labor, Bureau
of Labor Statistics, "The Employment Situation: September 2004,"
October 8, 2004.
According to the Current Population Survey,
also known as the household survey, 139,480,000 Americans were
employed in September 2004--not far from the survey's high of
139,681,000 in August 2004.
Department of Labor, Bureau of Labor Statistics, "Effects of Job
Changing on Payroll Survey Employment Trends," August 6, 2004, at
U.S. Department of Labor, Bureau of Labor
Statistics, "Business Employment Dynamics: Fourth Quarter 2003,"
August 3, 2004.
U.S. Department of Labor, Bureau of Labor
Statistics, "Extended Mass Layoffs Associated with Domestic and
Overseas Relocations, First Quarter 2004 Summary," June 10, 2004,
(October 13, 2004).
U.S. Government Accountability Office,
"International Trade: Current Government Data Provide Limited
Insight into Offshoring of Services," GAO-04-932, September
22, 2004, at www.gao.gov/new.items
/d04932.pdf (October 13, 2004).
U.S. Department of Commerce, Bureau of
Economic Analysis, "Foreign Direct Investment in the United States:
Detail for Historical-Cost Position and Related Capital and Income
Flows, 2003," and "U.S. Direct Investment Abroad: Detail for
Historical-Cost Position and Related Capital and Income Flows,
2003," in Survey of Current Business, Vol. 84, No. 9
(September 2004), p. 66, Table 4, and p. 107, Table 4, at www.bea.gov/bea
/pub/0904cont.htm (October 13, 2004).
Carmen DeNavas-Walt, Bernadette D. Proctor,
and Robert J. Mills, "Income, Poverty, and Health Insurance
Coverage in the United States: 2003," U.S. Department of Commerce,
Bureau of the Census, P60-226, August 2004, at www.census.gov/prod/2004pubs/p60-226.pdf
(October 13, 2004).
Shailesh Bhandari and Robert Mills, "Dynamics
of Economic Well-Being: Health Insurance 1996-1999," U.S.
Department of Commerce, Census Bureau, P70-92, August 2003, p. 10,
70s/p70-92.pdf (October 13, 2004).
eHealthinsurance, "Health Savings Accounts
Fact Sheet," April 2004, at
October 13, 2004). See also Derek Hunter, "New Data on Health
Insurance, the Working Poor, and the Benefits of Health Care Tax
Changes," Heritage Foundation WebMemo No. 492, April 28,
2004, at www.heritage.org/Research/HealthCare/wm492.cfm.
U.S. Department of Commerce, Bureau of the
Census, "Historical Poverty Tables," Table 2: Poverty Status of
People by Family Relationship, Race, and Hispanic Origin: 1959
to 2003, revised August 26, 2004, at www.census.gov/hhes/poverty/histpov/hstpov2.html
(October 13, 2004). See also Robert Rector, "Understanding Poverty
and Economic Inequality in the United States" Heritage Foundation
Backgrounder No. 1796, September 15, 2004, at www.heritage.org/Research/Welfare/bg1796.cfm.
Rector, "Understanding Poverty and Economic
Ibid., p. 3, Figure
Margaret Andrews, and Steven Carlson, "Household Food Security in
the United States 2002," U.S. Department of Agriculture,
Economic Research Service Food Assistance and Nutrition Research
Report No. 35, October 2003, at
Mills, "Dynamics of Economic Well-Being," p. 3, Figure
DeNavas-Walt, Robert W. Cleveland, and Bruce H. Webster, Jr.,
"Income in the United States: 2002," U.S. Department of
Commerce, Bureau of the Census, P60-221, September 2003, p. 25, at
www.census.gov/prod/2003pubs/p60-221.pdf (October 13,
Robert Rector and
Rea S. Hederman, Jr., "Two Americas: One Rich, One Poor?
Understanding Income Inequality in the United States," Heritage
Foundation Backgrounder No. 1791, August 24, 2004, p. 5,
Chart 2, at www.heritage.org/Research/
Ibid., Table 1, p.
Ibid., Chart 6, p.
Budget Office, "Effective Tax Rates Under Current Law 2001-2014,"
August 2004, pp. 10-11, Table 2, at
www.cbo.gov/ftpdocs/57xx/doc5746/Report.pdf (October 13,
Scott Hodge, "40
Million Filers Pay No Income Taxes, Many Get Generous Refunds," Tax
Foundation Fiscal Facts: Putting a Face on America's Tax
Returns, June 5, 2003, at
www.taxfoundation.org/ff/childcredit.html (October 13,
Rea S. Hederman,
Jr., "One Cheer for the Tax Extender Package," Heritage Foundation
WebMemo No. 572, September 23, 2004, at
Budget Office, "The Long-Term Budget Outlook," December 2003, p.
56, at www.cbo.gov/ftpdocs/49xx/ doc4916/Report.pdf (October
Ibid., pp. 45 and