FORTUNE – The U.S. economy is in bad shape. And with GDP barely growing during the first half of this year, it’s plausible that the economy could take a turn for the worse in the coming months.
We’re slogging through a recovery that’s so weak it doesn’t feel like one at all. Interest rates are at record lows, and unemployment still hovers above 9%. Consumers aren’t spending, and neither are companies. CEO sentiment, as measured by Chief Executive Magazine, is slipping, Harris Private Bank’s Jack Albin noted to clients. This could certainly spell more trouble for the jobs market.
One of the most volatile components of GDP throughout the economic downturn has been spending on investment goods, such as equipment, software and residential and nonresidential construction. From the economy’s peak during the last three months of 2007 to the recession’s official end in June 2009, GDP fell by only 5.1% while investment spending fell significantly more by 34%, Harvard economist Gregory Mankiw noted earlier this week in The New York Times.
Business investment has been particularly weak. During the two years after the 1982 recession, capital investments in things like software and equipment grew by 27%, but business spending has grown barely half that over the last two years.
This certainly isn’t because companies don’t have enough money to invest in more workers and equipment. After all, many of America’s biggest corporations are boasting record-high cash balances.
One of the biggest problems companies face is weak consumer demand. Executives can’t justify hiring an extra worker or making another product if consumers aren’t demanding it. There is no easy answer to fix this vicious cycle, but there are a few options worth considering:
Give workers an instant pay bump. Consumer demand is weak, but what if those consumers received an instant pay bump? President Obama’s recently announced jobs plan includes extending and expanding the existing payroll tax cuts, with workers receiving a 1.1 percentage point reduction from current levels through 2012.
This could potentially get them to spend more, giving companies reason to hire more. Admittedly, it may not be that clear-cut. Some economists have argued the current payroll tax cut hasn’t been very effective in spurring significant purchases as consumers deal with higher food and fuel costs. What’s more, even with the extra cash in each paycheck, many people who are trying to climb out of debt have been eager to save rather than spend.
But the tax cut could nevertheless spur consumption (albeit, modestly), particularly among lower-income households who are less inclined to save what little they currently have. With the tax break at today’s rate, workers on average will see $934 more in their paychecks over the course of this year, according to the Tax Policy Institute. Without the extension, for example, the nation’s 1.4 million truck drivers, whose salaries average $39,450, would pay $789 more in payroll taxes on average while nurses whose salaries average $67,720 would see their net income fall by $1,354 on average.
The president has also proposed extending the tax break paid by employers, but it’s hard not to wonder if lawmakers should give more support to workers instead since many companies are already flush with cash and still aren’t investing much.
Make it cheaper to sell goods abroad. U.S. manufacturing initially led the economic recovery. New orders gave factories reason to invest in more workers, but after natural disasters in Japan disrupted supply chains and affected U.S. factories, the growth of manufacturing has slowed. And it could grow slower as debt problems in Europe intensify and unnerve investors.
Needless to say, it will be difficult to makeup for the fall in global demand, but the U.S. could stimulate manufacturing by making it less costly to sell goods and services abroad. Three free-trade agreements are pending — with South Korea, Colombia and Panama. The agreements would eliminate tariffs and expand exports of American goods by about $12 billion a year, according to the U.S. International Trade Commission. This has been in the works for the some time now (they originated with the Bush administration), but for various reasons they are still awaiting Congressional approval amid political wrangling.
Create a bank for public infrastructure. Throughout the economic recovery, many have supported more spending to build and rebuild the nation’s roads, bridges and other infrastructure. The idea that this would lead to a flurry of job growth dates back to the days of the Great Depression when thousands were put to work on vast public infrastructure projects.
To be sure, returns on infrastructure investment take time. And while government could pour more money into new projects, a big way to lure private investment in the efforts is through an infrastructure bank. The idea, which Obama and other lawmakers have supported, is to create a public agency to help arrange financing for infrastructure. The government would attract private investors by paying for a portion of the overall projects costs and provide cheap loans and loan guarantees.
Conservatives could say that government facilitating the infrastructure bank merely adds to bureaucracy, but the agency has the potential to unleash a flood of private sector money fairly quickly.
Give homeowners a break. One of the big constraints holding back consumers has been the troubled housing market, since many homeowners owe more than their properties are worth. The Obama administration is discussing ways to boost refinancing as mortgage rates fall to record lows, but one option that some economists say is being overlooked is lowering homeowner’s monthly payments through a shared equity plan.
This is where the government would facilitate mortgage write-downs in exchange for claims on a percentage of future appreciation, making it not only a gain for homeowners who are underwater but also a win for lenders and investors who would eventually be repaid.
Needless to say, the problems of the U.S. housing market are deep. Nearly 11 million homes — which is equal to 22.5% of those with mortgages — were underwater during the three months ending in June, according to CoreLogic Inc. That’s down from 22.7% during the previous quarter, but only because more residences were lost to foreclosure. No single plan will fix the problem. However, lowering home payments on troubled mortgages could help free up spending at many households without exactly letting them off the hook with lenders.