No More Free Passes: GDP & Other Data
Anyone who attended my recent webinar on economic indicators—and paid attention—should know that the first release of the gross domestic product (GDP) report for the second quarter of any year is a big event. In addition to the second quarter reading on growth, the Bureau of Economic Analysis releases revisions for the prior three years. It presents a good opportunity to take another look at recent history.
Revisions tend to make people roll their eyes and be distrustful of important data. But the National Income and Product Accounts (NIPA) system, which produces GDP, is easily one of the most sophisticated statistical creations of the past century. The very fact that we have a system for measuring output changes in the ever-changing, highly diverse $18 trillion U.S. economy is quite remarkable. With all of its faults, GDP is still by far the best way to track the progress of any economy and the U.S. economic statistical system is head and shoulders above the rest of the world.
So you would think that the shining brilliance that produced such a wonderful tracking system could help us figure out how to produce healthy growth. Unfortunately, in the post–Great Recession period, that doesn’t yet seem to be the case. Seven years past the bottom of the most destabilizing downturn of the post–World War II era, growth remains exceptionally weak and uncertain in spite of historically accommodative monetary policy. Apparently, the only thing that rock-bottom interest rates has done is to prevent a pernicious deflation and thus far keep us out of another recession. The one thing that you can say about this tepid expansion is that it seems to have durability.
The second quarter of this year was actually a strong one for consumer spending growth—just above 4% on an annualized basis. And we even had a marginally positive, although still quite sluggish, reading on exports after three quarterly contractions. But why, this far into an expansion period, would we have three substantial quarterly contractions in equipment investment from the fourth quarter of 2015 with a 2.6% contraction in capital spending to a 9.5% contraction in the first quarter of 2016 to a 3.5% contraction during the second quarter? Investment weakness and export weakness are making life more than a little difficult for U.S. manufacturers. And these are factors that have held growth to an average of just 1% for the first half of 2016.
There are numerous other culprits in this frustrating story, including persistent global economic weakness and turmoil, generated by everything from significant slowdowns in key emerging market economies to a still struggling eurozone whose short-term outlook is now made all the more difficult by the abrupt and historic break with the United Kingdom. But the long-standing capital investment malaise must be a point of intense policy focus. It is a factor in an exceptionally weak productivity picture, significantly constraining potential growth.
None of this is going to change by itself. The “cycle” is not going to take care of the problem because the problems are not cyclical. If we want stronger productivity, stronger economic growth, a more competitive manufacturing sector, and a better wage picture, we are going to have to build them through smart and persistent investments. This economy is just not handing out any free passes anymore.