Why a booming economy feels flat

Think back to the last time the American economy was rapidly rolling forward: output growing more than 4 percent a year, millions of new jobs were created, and unemployment on a downward slope.

Yes, the 1990s was a golden economic era. But the description refers to the performance that began last year.

Despite continued strong economic growth, this expansion is clouded with enough complications and uncertainties that, for many, it doesn't feel like good times.

The reason? A boom in corporate profits has not yet created a job market that makes workers feel secure, economists say. Hiring hasn't skyrocketed. Worse, wages are stagnant. This paycheck squeeze may prove more worrisome than soaring oil prices and concerns over a housing bubble. Some experts worry that wage stagnation may prove more permanent this time, because of an increasingly global market for labor.

Few economists claim that today's economy matches the late 1990s, when unemployment was lower and job numbers seemed to rise as easily as the Dow Jones Industrial Average.

There are real differences - higher oil prices are just the most obvious. But the current expansion is also occurring against a backdrop of worries.

The pace of job growth, for one thing, was almost imperceptible during two years of concern about a "jobless recovery." Now that the economy has some momentum, the financial press is focused on threats to consumer well-being, such as the burden of energy costs and a soaring real estate market.

"Surveys show that even though the economy is growing reasonably strongly, a lot of households don't feel that," says Nariman Behravesh, chief economist at Global Insight in Lexington, Mass.

He points to two key reasons. First, since the last recession ended in November 2001, job growth has been weak until last year, when the Labor Department's employer survey showed a gain of 2.2 million jobs. Second, wage growth has been lackluster, despite strong gains in worker productivity.

Normally, as employees are able to produce more in each hour of work, the result is greater cash flow that can be divvied up between workers and owners or investors. In the long run, rising productivity means rising wages and living standards.

But in the short run, "most of the gains in the economy have gone into profits rather than wages," says Mr. Behravesh.

The latest numbers from the Labor Department, in fact, show average weekly earnings for US workers have fallen by 0.5 percent in the past year, after adjusting for inflation.

The divergence between productivity has sparked a debate among economists. Some say the gap is temporary, and will narrow as the labor market tightens and workers get more leverage to bargain. Others worry that it's a sign of new realities in the global marketplace that are pushing down US wages as workers compete with increasingly educated rivals in places such as India, China, and South Korea.

Whichever view proves more valid in that debate, many Americans are feeling the combined pinch of slow wage growth, jobs that still aren't as plentiful as many would like, and a stock market that's snorting pretty softly for a bull.

Only 37 percent of the public thinks the national economy is in good shape, according to a June poll by the Pew Research Center poll. That's higher than two years ago, but down from 2004. Perhaps more ominously, the percentage of the public rating their own financial situation positively fell to 44 percent, down from 51 percent in January. Sixty percent say jobs are too scarce in their community.

Some common surveys of consumer sentiment show less gloomy results - sitting not far from their long-term averages. But even professionals come to mixed answers as they try to assess the health of the current economy.

"It's hard for me to see this as a good economy," says Dean Baker, codirector of the Center for Economic and Policy Research in Washington. "It's doing better than it had been," but given that the nation went for four years without creating any jobs to speak of, "we have a lot of ground to make up."

By contrast, the glass is way more than half full to Brian Wesbury, an economist at Claymore Securities. He's expecting the nation's output, or gross domestic product, to grow about 3.8 percent this year, and about the same next year, after last year's gain of 4.2 percent. All those numbers are impressive, in the sense that they are above the level that most experts say is sustainable over the long term without sparking inflation.

"There's been a significant rebound," Mr. Wesbury says. "I've been very confused by the coverage" in the media, with its focus on gas prices and alleged housing bubbles. For many economists, those concerns are real, but not necessarily as frightening as recent headlines might imply.

Thanks in part to rising efficiency, energy costs represent only about 3.3 percent of household spending. That's up only a bit from its 1990s average. To many, the real worry is if oil prices jump further and remain at $75 a barrel or beyond, a scenario which may not occur.