Although the economics world has been consumed lately with debating whether President Trump can really boost America’s economic growth rate to three percent (for what it’s worth, the consensus seems to be that he can’t), RealityChek regulars know that this question is beside the point – at best. For as the nation should have learned, considerably faster growth is all too easy to generate. All Washington needs to do is flood the system with cheap credit and thereby inflate spending bubbles.
What really counts is the quality of growth, and by that standard, even the news reported Friday that the inflation-adjusted gross domestic product (GDP) expanded by a seemingly impressive annual rate of 2.54 percent is seriously wanting. For the internals of the GDP release (which included revisions going back to 2014) containing the first estimate of second quarter growth show that this improved performance (final, for now, first quarter growth was only 1.23 percent) depended too heavily on personal consumption – one of the “toxic combination” of GDP components (along with housing) whose outsized surge during the previous decade set the stage for the financial crisis and ensuing Great Recession.
In fact, the second quarter figures showed that, on a standstill basis, the economy has become nearly as consumption- and housing-heavy as during its pre-crisis peak, and that its consumption share has hit a new all-time high. These data also show that the economy is even more distorted in this manner than at the outset of the recession, by which time the housing collapse was in full swing.
That record personal consumption share of real GDP for the second quarter came to 69.60 percent – just slightly higher than the revised first quarter level. By comparison, consumption’s peak pre-crisis share of the economy was only 63.27 percent – in the first quarter of 2007. Three quarters later, as the recession officially began, it had risen to 67.25 percent, again, largely because housing was imploding (and had sunk to 3.91 percent of the after-inflation economy from 4.83 percent in the first quarter).
As for the toxic combination’s share of real GDP, it climbed to 73.10 percent in the second quarter of this year. That’s still short of the record 73.27 percent, from the second quarter of 2005. But it’s not far off. Further, the second quarter figure is a good deal higher than it stood when the last recession started at the end of 2007 (71.16 percent).
As I keep reminding readers, former President Obama stated that the real lesson of the financial crisis and recession was that America needed to create “an economy that’s built to last” – one much less reliant for growth on borrowing and spending, and more reliant on earning and producing. He was right. And the new GDP figures reveal that, some ten years after a generational slump began, macroeconomic progress toward preventing a repeat has been reduced to practically nothing.