Although you wouldn’t know it from the candidates or the press coverage they’ve generated, one of the biggest questions facing America this election year is whether it’s learned the main lessons of the last financial crisis – and therefore stands a good chance of avoiding a repeat. Last week’s official data on U.S. economic growth shed new light on the answer, and the message they’re sending is “Hold onto your hats!”
The main problem: Along with its advance estimate on the economy’s overall performance during the second quarter of this year (which was feeble), the Commerce Department also released revisions for the past three years. They make clearer than ever that the current, historically weak recovery is getting just as dangerously bubbly as the previous decade’s expansion. As usual, the main evidence is the outsized growth of the two sectors of the economy whose bloat paved the way for that last meltdown – personal consumption and housing. In other words, the nation had been borrowing and spending way too much, and saving, investing, and producing way too little.
As the United States sailed toward its scary Lehman Brothers moment, that toxic combination hit a record for its all-time share of total American economic activity: 73.27 percent of the gross domestic product (GDP) adjusted for inflation. Consumption peaked at 67.84 percent during the first quarter of 2007, and housing topped at 6.17 percent in the third quarter of 2005.
During his first term, President Obama put it well: America needed to become “an economy that’s built to last.” The crisis and ensuing depression did reverse those worrisome trends. But the new GDP statistics show that movement back toward those levels lately has been even stronger than previously reported. And what have we heard from American politicians and journalists? Nada.
Prior to the latest release, the toxic combination was reported (by me) to have reached a recovery-era high of 72.31 percent. Now we know that the figure was actually 72.42 percent. And the new (initial) second quarter number? An even higher 72.85 percent. Worse, the growth gap separating consumption and housing from the rest of the economy – particularly genuinely productive activity, like business investment – has been getting wider.
Housing is still far below its bubble-era levels – standing at just 3.57 percent of real GDP in the second quarter after totaling 3.64 percent in the first quarter. But for most of the last two years, consumption has been even more economically predominant than during the last decade. As of the second quarter, it represented 69.28 percent of real GDP.
History of course never repeats itself exactly, so there could be some “unknown unknowns” out there that will once more spare the United States and the global economy from repeating the last financial crisis – or a full-blown collapse – despite the resurgence of low-quality growth. But what kind of country would place all its eggs in that basket?