Engines of Healthy Growth Still Missing in Action
The following originally appeared on The Washington Times.
Rhetorically, at least, you don’t have to be a card-carrying deficit hawk to believe that an ongoing U.S. economic crisis triggered by reckless spending and borrowing gets genuinely overcome only by promoting saving and producing instead. President Obama says that he agrees, too; hence his call to create “an economy built to last” rather than one based on “bad debt and phony financial profits.”
That is why what’s most important about the government’s quarterly reports on economic output nowadays is not its discouraging habit of disappointing economists’ forecasts. These gross domestic product readings matter most because they reveal that, five years after the crisis erupted – and despite massive, debt-fueling government stimulus – the nation still can’t ignite even the feeblest sparks of economic life without playing with financial fire.
Last Friday’s GDP report, the initial gauge for the first quarter of 2012, sent a version of this message that was dramatic, but hardly off the charts. Inflation-adjusted growth clocked in at a weaker-than-expected 2.2 percent on an annualized basis. But although two more revisions are coming, as is the case every quarter, the crucial and disturbing structure of growth is unlikely to change dramatically.
Two of the first quarter’s growth leaders for America’s overconsuming, over-housed economy? Consuming and housing. The purchases of individuals and households drove fully 92.78 percent of the inflation-adjusted expansion registered by the economy from January through March. Residential construction generated another 20.35 percent. (Because so many other individual sectors of the economy, from government spending to business inventories, also add to and subtract from growth, the combined effects of many combinations can exceed 100 percent either positively or negatively.)
Growth was only half as consumption- and housing-heavy during the fourth quarter of last year – fueling 57.66 percent of the increase in real output. But since the economy technically began recovering from the Great Recession in mid-2009, personal consumption has accounted for just more than 64 percent of real U.S. growth, and when the still-depressed housing sector is added in, the figure approaches 66 percent.
The good news is that the current expansion is less dependent on this toxic mixture than the previous bubble-decade’s expansion. From 2002 to 2006, personal spending and housing spending contributed 80.58 percent of America’s inflation-adjusted growth. The bad news is that without these activities at dangerous levels, overall growth has been notably weaker.
Put differently, during this year’s first quarter, personal spending represented 70.73 percent of GDP (as opposed to GDP growth) after inflation. The consumption-plus-housing level was 73.32 percent. That latter figure is only slightly higher than the first-quarter level last year, and actually lower than the 73.83 percent percentage at the recovery’s mid-2009 outset. Even better, compared with the bubble years, the economy looks even less hooked on these leverage-prone components. From 2002 to 2006, consumption and housing combined made up between 74.78 percent and 75.88 percent of the U.S. economy.
Yet the tradeoff, again, has been lower growth – underscoring the reality of an economy unable to expand robustly without literally mortgaging itself to the hilt (and beyond) and shopping till it drops.
American growth has been strongly hooked on economic crack for less than two decades. Washington has tracked consumption plus housing as a share of the economy only since 1995, but as recently as 1997, they comprised only 71.32 percent of real GDP. And the economy expanded by an enviable 4.5 percent that year after inflation. So developing a much healthier – and more potent – growth mix shouldn’t be rocket science. But America’s original addiction took root and rebounded so quickly, and the first recessionary reaction struck so powerfully and rapidly, that there’s clearly no time to lose.
Alan Tonelson is a research fellow at the U.S. Business and Industry Council, a national business organization whose nearly 2,000 members are mainly small- and medium-sized domestic manufacturers. Author of “The Race to the Bottom,” Mr. Tonelson also is a contributor to the council’s website, www.AmericanEconomicAlert.org.