Since the crucial role played by low-quality (e.g., credit- and debt-fueled) growth in triggering the financial crisis and last recession keeps getting ignored even by most Americans who follow the economy professionally, I’ll keep posting on how well the nation has been faring in producing higher quality growth. Sadly, the new initial figures just in on gross domestic product (GDP) in the third quarter show that the answer remains “Not very well.”
The key measure I’ve been using is the share of the economy, adjusted for inflation, represented by personal consumption and housing combined. These two comprise the “toxic combination” that supercharged the debt boom during the last decade.
According to the first read on third quarter real GDP, the consumption share of the economy dipped – from an all-time record of 69.60 percent in the second quarter, to 69.49 percent. The housing figure shrank, too – from 3.49 percent to 3.41 percent.
As a result, the toxic combination total decreased slightly, from 73.09 percent to 72.90 percent. That’s below the all-time high for this pair – 73.27 percent, in the second quarter of 2005. But the difference is pretty modest.
And as suggested by the above, the big difference is in housing. It’s share of the economy after factoring out inflation peaked during the previous bubble decade at 6.17 percent.
Some good news might be emerging on the business investment front – though it’s far from conclusive and heavily dependent on the time frame examined. Corporate spending on plant and equipment and software and research and development is a much more durable foundation for growth (and prosperity) than personal consumption and home-buying. And there are signs that it’s becoming a more important growth engine once again. The best measure of this progress entails how much growth such spending is generating.
The results so far for this year? In the first quarter, business spending was responsible for a huge 71.67 percent of the economy’s modest (1.23 percent annualized) expansion in constant dollar terms. For the second quarter, the share was much lower – 26.45 percent of 3.03 percent total growth at an annual rate. And for the third quarter, 16.33 percent of 2.96 percent total annualized growth.
So the trend this year isn’t so encouraging. But compare it with last year. In 2016, business spending that fell in absolute terms subtracted 5.33 percent of the year’s 1.49 percent total growth. The previous year was better, but not as good as this year. In 2015, business spending only generated 10.34 percent of the year’s 2.86 percent real growth.
Earlier during the current recovery, most of the annual figures were much higher:
2010: 11.20 percent
2011: 53.15 percent
2012: 47.73 percent
2013: 25.29 percent
2014: 33.08 percent
The glass half-full interpretation? The previous two years were an aberration, and the growth role of business spending has resumed increasing. The glass half-empty view? During the last decade’s expansion, business spending’s spending’s contribution to growth was much higher in absolute terms, and accelerated impressively as the recovery continued. Here are those figures:
2001: subtracted 34.00 percent (the expansion officially began at year-end)
2002: subtracted 51.67 percent
2003: 8.21 percent
2004: 16.32 percent
2005: 25.15 percent
2006: 32.22 percent
2007: 42.22 percent
It’s surely too early to know which trend will prevail. Much more important is persuading American leaders to pay attention. For nothing will matter more in shaping the country’s economic future.