Since the government’s latest report on U.S. economic growth came out last Friday, it’s time to update RealityChek‘s monitoring of the quality of that growth – that is to say its makeup. This time, however, let’s do something a little different. Rather than simply review the figures on how dependent the economy has once again become on personal consumption and housing – the two sectors whose bloat led to the financial crisis in 2008 – at any given moment, let’s also look at exactly how much of the growth itself they’ve generated.
First, the stand-still numbers. They show unmistakably that the economy keeps creeping closer to being just as housing- and consumption-heavy as it was at the peak of the bubble in those sectors that le to that financial crisis and the Great Recession that ensued.
Peak bubble-ization occurred in the second quarter of 2005, when these two components of the gross domestic product (GDP) combined hit 73.27 percent. (As noted in this post, consumption and housing each peaked in different quarters.)
By the time the recession – the worst slump experienced by the nation since the Great Depression – had ended, in the second quarter of 2009, this figure had fallen to 70.94 percent, mainly because housing remained especially hard hit.
The new second quarter, 2016 number revealed in the Commerce Department data reported last Friday? 72.88 percent. That’s the highest level during this current recovery. (We’ll get the final revision, for the time being, next month.)
At the same time, the bad news doesn’t end there. For the economy is not only getting as bubbly as during the previous decade. It’s growing much more weakly.
The same troubling trends are apparent from the growth statistics themselves. From its second quarter, 2009 start through the second quarter of this year, the economy has grown in inflation-adjusted terms by $2.2146 trillion. But although 68.31 percent of economic activity seven statistical years ago was accounted for by consumption, these household purchases have spurred 75.91 percent of the real growth recorded since then. So consumption has clearly punched above its weight.
Housing has, too – to an even greater degree. Its share of real GDP had sunk to 2.63 percent as of the start of the recovery. But it’s been responsible for 9.56 percent of the economy’s recovery-era growth after inflation.
What happens when you put what I call this “toxic combination” together? At the recovery’s onset, as we say, they added up to 70.94 percent of real GDP. But their share of growth since then was much higher: 85.47 percent.
This method of examining American growth shows another out-performer, too: business investment. As RealityChek regulars know, its role during this recovery, and over a longer stretch, has sparked heated debate. But the controversy generally has revolved around why it’s been lagging. No need to weigh in on that subject here. For now, let’s note that although such spending – widely seen as a key to sustainable growth and prosperity – fell to 11.38 percent of real GDP at the recession’s end, it produced 24.42 percent of the real growth during this recovery. And let’s also recognize that in absolute terms, this part of the economy is still simply too small to have meaningfully slowed the revival of the toxic combination.
(Eagle-eye readers will note that these growth percentages add up to more than 100. That’s because other GDP components, notably trade and government spending, have subtracted from growth.)
If current trends continue (no guarantee, of course), sometime next year, the United States will have become even more consumption- and housing-heavy than it was at the height of the bubble decade. Will that milestone finally convince American leaders to pay attention to the quality of growth? Or will they wait until the economy crashes again?