As indicated in yesterday’s post, the final (for now) returns are in on America’s economic growth for the second quarter, and as RealityChek regulars know, it’s a new occasion to look at the crucial and sorely neglected subject of the quality of American growth. What the figures show is that, despite some tiny signs of progress, nearly a decade after a terrifying financial crisis caused by bloated spending on personal consumption and housing, the U.S. economy is still heavily dependent on growing via bloated spending on personal consumption and housing.
First, let’s review the situation on a stand-still basis. For the second quarter, the share of inflation-adjusted gross domestic product (GDP) comprised by personal consumption came in at 69.60 percent. This figure – for the first full quarter of the year during which Donald Trump has been president – was slightly above the 69.56 percent for January-March quarter, and an all-time record.
The second component of what I’ve called the “toxic combination” is housing spending, which stood at 3.49 percent of real GDP. That’s lower than the 3.58 percent share for the first quarter, and (thankfully) well below the record of 6.17 percent set at the height of the previous decade’s housing bubble, in the third quarter of 2005.
Nonetheless, because personal spending has become so strong, the total toxic combination in the second quarter came to 73.09 percent of after-inflation GDP. That’s a bit below the 73.14 percent share for the first quarter but, more important, it’s just slightly less than the record 73.29 percent of real GDP set by the toxic combination set in the second quarter of 2005. So it’s difficult to argue that one of the biggest lessons of the financial crisis and ensuing recession has been learned.
The picture looks somewhat better lately when the economy’s main growth engines are examined – that is, when we analyze the economy on a dynamic, not a stand-still basis. During the second quarter of 2017, the toxic combination of personal and housing spending generated 64.03 percent of after-inflation growth. That’s less than half their share during the first quarter (140.65 percent – these numbers can be more than 100 percent because of the GDP components that subtract from growth).
It’s also a considerably smaller growth role than such spending has generally played since very early in the economic recovery. In fact, here’s how much constant dollar growth the toxic combination spurred, by year, from 2011 (when the economy was returning to normal following a deep slump and strong but largely incomplete initial snapback) to 2016: 97.50 percent, 60.36 percent, 79.17 percent, 80.16 percent, 98.25 percent, and 138.26 percent.
Even better, the growth role played by business spending – which creates productive assets like factories and labs, and also includes spending on research and development – could be on the upswing. The figures for the first two quarters of this year have been volatile, and in the wrong direction: 69.62 percent and 27.06 percent respectively.
But these numbers together so far have reversed the trend from 2011 to 2016 – when the share of growth accounted for by business spending plummeted from 53.75 percent to turning into a small growth drag.
The stand-still numbers, however, show that the U.S. economy remains so heavily skewed toward personal and real estate spending that only a major – and doubtless unprecedented – surge of business spending can start turning matters around. And the economy will remain far too fragile and crisis-prone till it does.