Interested in seeing in one convenient article nearly everything that’s been wrong with economic commentary in America for at least the last decade? Check out Chico Harlan and Sarah Halzack’s coverage for the Washington Post of the new government economic growth report – that is if you don’t mind ruining what’s left of your Saturday. You will get a special bonus, however. I’ll use the new figures – which provided our second look at first quarter economic growth – to spotlight how the fundamental problems that led to the last financial crisis and painful recession look as serious as ever.
The article’s problems began almost immediately, with Harlan and Halzack focusing on slower-than-recently-normal household growth, and then describing “the newfound prudence of American consumers” as”the country’s core economic dilemma.” But what kind of definition of “prudence” includes spending that grows even as the economy’s production shrinks after adjusting for inflation, as was the case in the first three months of this year? It’s sure not one with any awareness that Americans’ prolonged living beyond their means and financing their lifestyles largely through excessive borrowing was one big reason the economy fell apart so badly seven years ago that it still hasn’t fully recovered. Nor is it one that takes into account how robust U.S. growth was for so long in the 1950s and 1960s with much more modest consumption and consequently much higher personal savings rates.
Indeed, in that vein, let’s give a special Bronx Cheer to chief White House economic advisor Jason Furman (who, unlike Harlan and Halzack, at least has the excuse of working for a politician). Seeking to spin yesterday’s dismal economic numbers, Furman suggested that economic health would return “If the savings rate snaps back to its previous level for the rest of 2015″ because then “consumption will grow at a brisk 4 percent rate.” So apparently the president who once recognized America’s need to scrap the borrowing- and spending-heavy ways that helped trigger disaster and create “an economy built to last” now wants his countrymen to go on a shopping binge again.
Moreover, Harlan, Furman, and other spendaholics need to acknowledge that whatever consumer caution is being displayed seems to be limited to goods and services Made in the USA. Specifically, on a quarterly basis, first quarter personal consumption is now reported to have grown at a 1.8 percent annualized real rate – much lower to be sure than the 4.4 percent figure for the fourth quarter of last year. But imports grew by 5.6 percent annualized in the first quarter.
Nor was this import domination limited to consumers. Business spending in the first quarter is now judged to have fallen by a 2.8 percent annualized rate. But since businesses buy from abroad, too, that healthy import growth number is telling us that whatever caution they displayed was concentrated on the Buy America side as well.
More reasons to doubt that the American consumer overall is becoming more financially responsible come from examining the new GDP figures from another perspective. If you look at the statistics the new revision provides that illustrate the economy’s make-up, you find that it’s just about as dominated by personal consumption and housing – the toxic combination that helped trigger the financial crisis – as it was during the previous bubble decade.
At the onset of the Great Recession created by that bubble’s collapse, personal consumption and housing combined made up 71.16 percent of the economy in real terms. That’s a figure for the fourth quarter of that year. The full-year figure – which covers months before the housing collapse was completed – was 71.91 percent. By the fourth quarter of last year, that share had actually risen slightly from the fourth quarter 2007 level (to 71.23 percent) but at least it was still slightly below the percentage for all of 2007.
The new data reveal that the gap has closed a little more. Personal consumption and housing accounted for 71.83 percent of the entire after-inflation economy – barely below the pre-crisis full-year 2007 figure, and actually above the 71.63 percent level reported in the initial first quarter GDP estimate released last month. Even worse, remember that that initial GDP reading had the economy growing slightly (by an annual rate of 0.2 percent), not shrinking at a 0.7 percent annual rate, as per yesterday’s release. So the economy’s most potentially dangerous segments are the ones growing fastest.
Still more revealing – at least on the eve of the bubble decade, the economy was growing at a rate greater than a rounding error (1.4 percent for that fourth quarter of 2007 in inflation-adjusted terms). The latest GDP figures show that although the economy is now contracting, it’s nearly just as consumption- and housing-heavy. And as it’s slowed since the snap-back of last spring, this toxic combination has grown in importance.
I understand the need for more economic growth. It could indeed cure a variety of employment and living standards ills, not to mention strengthening the nation’s still dicey public finances. But those benefits only come from high quality growth, at least over any significant stretch of time. Until Americans, their chattering class, and their leaders start paying more attention to how the economy grows, it’s hard to imagine genuine economic health – or any of its benefits – returning any time soon.