The government’s quarterly reports on the gross domestic product (GDP) are useful not only for measuring how fast the U.S. economy is growing or shrinking. They’re also useful for helping to measure whether American economic policy is achieving its most important objective – fostering growth that can be sustained because it’s based on a solid foundation, as opposed to growth that’s bound to implode because it’s based on gimmickry.
The message from the latest GDP report, released yesterday? Some progress has been made toward achieving this vital goal – described memorably by President Obama as creating “an economy built to last.” But although growth during the current economic recovery has been somewhat better balanced than before the financial crisis, its meager levels make clear that adequate substitutes haven’t been found for the engines of phony growth that helped inflate the 2000s bubble.
These trends can be tracked clearly by looking at the GDP report’s internals, and back to 1999 at the historical, interactive databases maintained by the Commerce Department’s Bureau of Economic Analysis. Housing and personal consumption were the main beneficiaries of the last decade’s credit boom, and their outsized growth is clear from the GDP details.
In the second quarter of 2014, this toxic combination comprised 71.34 percent of the total economy adjusted for inflation. That’s better than the 71.57 percent they made up of first quarter GDP. But it’s higher than the annual figures for 2013 and 2012 – 71.22 percent and 70.83 percent, respectively.
The latest figure is also higher than 69.70 percent of GDP recorded for 1999 – the earliest figure available. More encouragingly, it’s lower than the 73.09 percent level in 2005 – the bubble decade peak, and lower than the 71.91 percent level of 2007, the last pre-recession year. But the fourth quarter housing-plus-personal-consumption share of real GDP wasn’t that much lower than those bubble-era figures. And those were the years when the economy, as President Obama has so rightly noted, was in full “house of cards” mode.
So U.S. growth has been healthier, but it’s not significantly healthier. It’s true that slow rebalancing may be the best Americans realistically can hope for. But the recession began six and a half years ago, and the recovery just turned five. When does needed patience become denial?
Another reason for concern: However slow rebalancing has been, growth has been slower still. Acceptable levels of growth make up the second half of the rebalancing process. Their return would indicate that the economy has not simply gone cold turkey. It’s figured out how to prosper without economic narcotics.
In 1999, when personal consumption and housing hadn’t yet reached 70 percent of total real GDP, the economy grew by 4.7 percent. But maybe that’s not an entirely fair comparison, since that excellent performance stemmed largely from a tech spending bubble that was just as artificial and unsustainable as the following decade’s credit bubble.
Real growth in 2005, the peak bubble year, was 3.3 percent. Way too much of that 3.3 percent came from housing and personal consumption. But with the former, in particular, greatly shrunken since the bubble’s maximum bloat – from 6.13 percent of real GDP in 2005 to 3.11 percent last year — growth has fallen off as well. Real GDP expanded by 3.3 percent in 2005. Last year’s figure was 2.2 percent.
It’s not that alternate engines of growth aren’t available. The growing U.S. trade deficit is turning into a major obstacle to faster recovery. Just stopping this bleeding would produce better numbers; meaningfully cutting the trade shortfall would not only quicken recovery, but reduce the national debt’s increase. Business spending has been largely missing in action in this recovery as well. Trade policy overhaul could help solve this problem, too, by reducing the incentives to build so many of the factories and labs companies do plan to invest in overseas rather than in America.
Sadly, neither of the two major parties has offered an economic game plan that could both boost recovery and promote major economic healing. Until they do, put me in the secular stagnation camp– which believes that the United States has lost the ability to grow acceptably without blowing bubbles.