Weak and Unbalanced: The Story of US Economic Growth Since 2007

We are now beginning our seventh year following the end of the previous business cycle. Most business cycles don’t last seven years. Yet the story is that we continue to struggle with recovery and despite a relatively strong end to 2013, many Americans believe we remain mired in a recession. So it is helpful to examine the last six years of growth to see what is what.

It is a pretty simple story. The economy is well below where it should be. The main strength in the economy has come from consumer durables largely the result of historically low interest rates and American’s love of autos. Close behind autos is government spending on non-defense items. While export sales of goods and services seem impressive – import sales on services have also increased – so even international trade ends up as a modest factor when we net imports from exports. On the negative side is a failure to revive spending in construction and reductions in state and local government spending. Federal government spending on defense has also not recovered to 2007 levels. Business spending on equipment grew by a mere 4% in six years.

Below is the analysis that supports those conclusions. The table below comes from newly released figures for real (chained) GDP from www.bea.gov .

At the end of 2013 real GDP reached almost $16 trillion. There is much being written about the US economy growing by 3.2% in the fourth quarter of 2013 and more than 4% in the quarter before that. Clearly the economy is gaining some momentum as I said in an earlier post. It is helpful, however, to take a longer term view of the US economy’s growth. In that way we get a more complete picture as to where we have come in the past six years. Last week I focused on 6-year employment changes. This week the focus is on national output or real GDP.

In the third data column in the table below I calculate the change in real GDP since the fourth quarter of 2007. In those six years real GDP has grown by almost a trillion dollars – or $970 billion. That $970 billion amounted to a 6.5% change since 2007. Percentage changes are in the fourth column of the table. National production was 6.5% higher at the end of 2013 than it was in the closing quarter of 2007. Think of real GDP as a big pile of stuff (goods and services) that the country produces in a year. The pile was some 6.5% higher in 2013 than it was in 2007.

While we all know that we suffered a recession in 2008 and half of 2009, this 2013 pile is pitiful. Yes, it is 6.5% bigger than the pile of 2007. But keep in mind that we have had almost five years to grow after the end of the recession. It is not unusual in past recoveries that real GDP would grow by 6.5% in one year. But then this was not a typical recession. So let’s ask what would have happened if the economy had grown by 3% each year since bottom of the recession. The economy bottomed at about $14.4 trillion, so a 3% annual growth rate would have brought the economy to about $16.5 trillion by the end of 2013. If the economy had grown at an average of about 4% per year since the recession, real GDP would have reached about $17.1 trillion at the end of 2013. The slow post-recession growth has cost the country's output somewhere between $500 billion and $1.1 trillion. Of course, since population growth did not stand still over these six years the result has been virtually no increase in output per person.

We could also ask what would have happened if the economy had grown by 3% since 2007. Normal growth in the economy without a recession would have brought us to producing about $18 trillion per year. Thus, the economy is about $2 trillion behind where it normally would have reached. We cannot revoke the recession but it helps to have a benchmark that shows what we have lost from a combination of the recession and the subsequent slow growth. We could say the recession cost us about a trillion and the slow growth another trillion.

The next question concerns the allocation of these goods. The shortfall in national production was not evenly shared. The data shows that some sectors have done much better than others. Traditional macroeconomic analysis breaks GDP into buying components based on who does the buying – generally referred to as consumption, investment, net exports, and government. The table lists most of the key GDP demand-side components.

Here is what we learn from GDP components from 2007 to 2013

·        We have very unbalanced growth

·        Despite massive stimulus and extreme monetary policy, the evolution of real estate is incomplete. Spending by households on new shelter and companies on structures, remain 17-20% behind 2007. Keep in mind that these sectors are recovering from a very low base. So low percentage increases on a low base are especially weak. 

·        Household spending on durable goods – especially automobiles – is carrying much of the load of spending. Other consumer spending – on nondurables (like food and clothing) and consumer services – have grown roughly equal to the lackluster pace of the overall economy.

·        Spending on business equipment rose by 4% in six years. This is an important sector for productivity and competitiveness since it pays for new capital and drives innovation and modernization

·        Government stimulus has come mostly from federal spending on non-defense. Defense spending and State and Local Government Spending remain well below 2007 levels.

·        What remains is foreign trade. Exports of both goods and services have been a mainstay of the spending increases but some of the growth in domestic spending has been imported services and goods. Inasmuch, the net impact from trade is not impressive.

Consider the components that were still languishing in late 2013. These GDP components have not regained spending levels of 2007 (in parentheses is the percentage amount in 2013 relative to 2007)

·        Structures (-19%)

·        Residential Construction (-17%)

·        State and Local Government (-5%)

·        National Defense (-2%)

GDP demand sectors showing the most strength since 2007 were:

·        Consumer Durable Goods (18%)

·        Exports of Goods (22%)

·        Exports of Services (17%)

·        Imports of Services (17%)

·        Federal Government on Non-defense (11%)

TABLE. Selected GDP Components 2007, 2013, and Change

(billions and percent change)

Source: www.bea.gov  Chained version of Real GDP

	2007	22013	CHG	%CHG
GDP	14,996	15,966	970	6.5
C Durable goods	1,156	1,368	213	18.4
C Nondurable goods	2,238	2,374	136	6.1
C Services	6,676	7,108	432	6.5
I  Structures	537	437	-100	-18.6
I  Equipment	910	946	36	4.0
I Residential	586	487	-100	-17.0
Exports Goods	1,181	1,442	262	22.1
Exports  Services	536	630	94	17.6
Imports Goods	1,936	2,006	70	3.6
Imports Services	388	437	49	12.6
G National defense	708	695	-14	-1.9
G Nondefense	390	431	41	10.6
G State and local	1,843	1,745	-97	-5.3