As encouraging as last week’s official report on U.S. economic growth was – with the rate picking up even more than expected in the second quarter despite numerous forecasts of continued and even worsening slowdown – one big fly was visible in this ointment. The quality of the nation’s expansion has been weakening considerably this year, and as known by RealityChek regulars, growth overly dependent on the wrong engines can inflate the kinds of bubbles that burst so disastrously a decade ago, and triggered a frightful global financial crisis and a deep, punishing recession.
The specific internals of these reports on the gross domestic product (GDP) to track for signs of bubble-ization are personal consumption and housing. For their bloat provided most of the hot air during the 2000s (along with most of the actual growth). And the GDP report for the third quarter of this year (the most recent data available), as was the case since the second quarter, showed that these two GDP elements have driven growth much more powerfully than during that deceptively prosperous era. Further, during the last two quarters overall, growth has looked far bubblier by this measure than at any time during former President Barack Obama’s administration, with one exception. In fact, the second quarter of this year was the bubbliest ever. (More specifically, since 2002, when government figures enabled these calculations to be made.)
The table below shows the actual annual figures from 2002 through 2018 (leaving out only the recession years 2007-2008, and 2008-2009). The left-hand column shows how much total inflation-adjusted growth (the growth rate most closely followed by students of the economy) in each year was fueled by growth in personal consumption plus growth in housing. The center column shows the annual after-inflation growth rate for that year. And the right-hand column shows the difference between that toxic combination’s growth rate, and growth itself.
That ratio is important because it helps makes clear the relationship between growth’s health on the one hand and its rate on the other. Put differently, it makes possible answering the question of whether and when the U.S. economy has been growing acceptably without excessive contributions from the toxic combination.
percent of growth actual growth rate difference
02-03: 91.11% 2.86% 31.86 times greater
03-04: 74.65% 3.80% 19.64 times greater
04-05: 79.25% 3.51% 22.58 times greater
05-06: 58.86% 2.86% 20.58 times greater
06-07: 27.01% 1.88% 14.37 times greater
09-10: 43.77% 2.56% 17.10 times greater
10-11: 82.80% 1.55% 53.42 times greater
11-12: 59.64% 2.25% 26.51 times greater
12-13: 71.58% 1.84% 38.90 times greater
13-14: 83.80% 2.54% 32.99 times greater
14-15: 96.58% 2.91% 33.19 times greater
15-16: 127.04% 1.64% 77.46 times greater
16-17: 81.13% 2.37% 34.23 times greater
17-18: 69.55% 2.93% 23.74 times greater
One conclusion that leaps out from these results: They bounce around considerably. But they show that growth during the Obama years was somewhat bubblier than during the previous and notorious bubble decade (even leaving out the huge jump in 2015-16), and that its health from that anomalous year steadily improved during the first two years of the Trump administration.
Especially noteworthy: The best Trump growth year (2017-18) was significantly less bubbly than the best Obama year (2014-15) even though that Trump year saw somewhat faster growth.
But what a turnaround since then! As the table below shows, major growth quality improvement continued into the first quarter of this year. Was the economy finally demonstrating the ability to grow strongly by using much safer engines? Unfortunately not, as growth’s quality simply collapsed in the second quarter, and even the third quarter improvement registered so far has kept it in the danger zone.
percent of growth actual growth rate difference
1Q 19: 24.62% 3.06% 8.05 times greater
2Q 19: 150.42% 2.00% 75.21 times greater
3Q 19* 102.70% 2.11% 48.67 times greater
On a standstill basis, the economy lately has looked bubblier than at any time during the Obama years, and in fact is approaching its bubble decade condition. During that period, personal consumption and housing combined regularly stayed above 73 percent of real GDP. Its annual peak came in 2005 – 73.50 percent.
The toxic combination’s share of the economy fell fairly steadily thereafter until 2012 – as did the growth rate itself – and then began rising again (while growth itself continued to slump) from 70.62 percent to 72.58 percent in 2016.
The trend continued into 2017 (72.96 percent) before the percentage dropped the following year to 72.69 – as growth itself picked up.
After falling further in the first quarter of this year (to 72.35) as growth itself rose further, the toxic combination’s role swelled to 72.90 percent in the third quarter – not far off the bubble decade levels. Unfortunately, growth itself has tailed off dramatically to 2.11 percent annualized.
Overall, the Trump economy still remains less bubbly
than the Obama economy. For the 32 months during which the former President was in charge of economic performance, the toxic combination generated 80.74 percent of total growth. During the nine months of Mr. Trump’s economic stewardship, that figure stands at 72.64 percent. But the gap has been closing this year, and as long as it keeps narrowing, President Trump’s economic legacy will remain very much up in the air.