As usual, all the buzz about this morning’s final (for now) revisions to second quarter U.S. economic growth was about the quantity of growth. For a country that’s still pretty growth starved, that’s understandable. But I wish the powers-that-be paid more attention to the quality of growth. In the proverbial long run, the only sustainable growth is high quality growth. Or have you already forgotten the last decade’s historic bubbles and their bursting, and think that Americans can keep borrowing and spending their way to prosperity?
Today’s gross domestic product (GDP) numbers were by no means devoid of good news on this score. In line with my finding yesterday, business investment powered 25.65 percent of the second quarter’s 4.60 percent annualized growth. This role is much bigger than that played by such investment before the late-1970s, when Corporate America supposedly started to get hooked on fast buck strategies at the expense of genuinely productive uses of profits and credit. And measured as a share of real gross domestic product on a static basis, the latest 13.11 percent business investment number is historically elevated, too.
Another positive long run sign: The economy is growing in real terms even though government spending is falling. Since the recovery began, total public sector consumption and investment is off nearly seven percent adjusting for inflation. In fact, as noted by Rex Nutting of Marketwatch.com, in absolute terms, federal spending is now below its level at the start of the Great Recession. In fact, this spending has been dropping in abolute terms for seven straight quarters.
At the same time, it’s far from clear that the United States is on an austerity path. Since the recovery began officially, in mid-2009, nearly 56 percent of the decline in real federal outlays has come in defense. Moreover, state and local government spending during the recovery has dropped by only 5.99 percent – substantially less than the 8.53 percent federal spending decrease – and it’s up 1.47 percent over those last seven quarters during which federal spending fell.
Other signs also abounded that America remains far from creating what President Obama has called “an economy built to last” – one based on producing real wealth in the form of everyday goods and services, not simply binge consuming. Principally, the 2000s bubble was inflated mainly by soaring spending by households and by soaring spending on homes. The new GDP figures show that such spending now comprises 71.26 percent of the total economy after inflation. That’s lower than the 71.56 percent level in the first quarter of this year. But it’s higher than the 70.94 percent in the second quarter of 2009 and the 71.16 percent of the last quarter of 2007.
In other words, the economy has become more housing and consuming heavy not only since the recovery began, but since the last recession started. To me, that still sounds too much like an economy built to implode.