If you really want to know what’s going on with the U.S. economy, and especially what its main problem continues to be, forget about the headline number on growth in the third quarter (1.50 percent, annualized, after inflation) that the government reported this last week – and not just because it’s going to be revised several times going forward. Instead, look at the quality of that growth and, by extension, what the economy mainly consists of these days. You’ll see that it’s become nearly as bubble-ized as during the previous decade of phony growth that led to the financial crisis and its punishing – and ongoing – aftermath.
Following the worst economic debacle since the Great Depression of the 1930s, you’d think that America’s political, business, finance, and academic leaders would recognize that, for all the virtues of and indeed the necessity of economic growth, all growth is by no means created equal – or at least not all economic activity defined by the federal government and the economics profession’s mainstream as growth.
For example, when a natural disaster ravages a certain location, and the damage is repaired, the repair work – whether mainly done by government or the private sector – counts as growth. When the government increases its spending for any reason, that counts as growth (including on weapons that never get used). When households make purchases with borrowed money, that counts as growth. When businesses make much more of a product than anyone can possibly use, that counts as growth.
The government’s methods for counting growth do provide some correctives. Notably, any purchases of goods or services that come from abroad are recorded as subtractions from the overall size of the economy (the gross domestic product, or GDP), and from growth (when they increase on net). And if business over-production goes to stocking inventory, and those inventories are eventually drawn down because not enough customers wanted the stuff, this so-called liquidation is considered a subtraction from growth and GDP as well.
But lots of debt-fueled growth quite comfortingly supports the notion that the economy is expanding normally, because as we’re discovering during this weak economic recovery, Washington’s ability to create credit without incurring disaster – at least so far – is much greater than previously thought. And some economists view it as even greater than has been seen, and even practically limitless.
If, like entirely too many of America’s political and other leaders, you’ve already forgotten the dangers of over-reliance on debt-fueled (i.e., low-quality) growth, then the below data won’t trouble you in the slightest. If you are worried about the quality of growth, you’ll find plenty of reasons to think that the economy is steadily falling into the same trap that victimized it between 2001 and 2007, and eventually produced the near-meltdown that began right afterwards.
As I’ve repeatedly written, the low-quality growth of the bubble decade was dominated by a surge in household consumption and home-building. When the previous decade’s expansion began, in the fourth quarter of 2001, these two activities together represented 71.97 percent of gross domestic product, adjusted for inflation. The inflation of the housing bubble in particular drove that number to an all-time high of 73.27 percent in the second quarter of 2005. And even though housing began collapsing soon after, it still stood at 71.40 percent when that recovery ended, in the fourth quarter of 2007.
The growth figures that came out last Thursday revealed that this toxic combination stood at 71.98 percent of the economy after in inflation. That’s well above the level at the last recession’s start and, just as important, even farther above the level when that recession ended in mid-2009, when it fell to 70.94 percent. It’s also the highest such level of the current expansion. In other words, growth during this current recovery – which has pleased almost no one aside from Democratic politicians – has not only been subpar historically. It’s been driven by the same unreliable fuels responsible for the fake growth of the bubble decade.
The main change between that growth and today’s is that housing activity is still relatively subdued, and household spending dominates. In fact, according to the just-released third quarter numbers, it no represents 68.74 percent of inflation-adjusted GDP. That’s a new record. The former high, 68.66 percent, was set in the first quarter of 2011. But housing then came to only 2.52 percent of real GDP. Now it’s 3.24 percent.
President Obama, for one, has recognized the perils of bubble-ized growth, and the urgency of scrapping the country’s “house of cards” business model and creating “an economy built to last.” The newest GDP figures are a sobering reminder of how quickly and thoroughly this imperative has been forgotten.