Tuesday, November 25, 2014

Slow and Unbalanced Growth in the United States

Like a pig in mud, I love to root around in the data. A macro guy loves it when the BEA releases another quarter’s worth of GDP.  Like a goat on top of a waste dump, you just never know what you will find. So you just dig in.

And I did just that. The data for the third quarter of 2014 was recently released and now that the smoke has cleared, I thought I might spend a perfectly fine afternoon seeing what I could see. And the results are pretty interesting. Have you heard the term “unbalanced growth”? The US economy looks today like a teenager with a pea-size head and arms that drag on the ground. We can only hope that things equalize in the future!

I use the Q3 results to do some comparison analysis. I could wait a few months to do this exercise but I could also wait to bite into that super-hot slice of pizza too. So we could get a collective burnt roof of our mouth here by focusing on the third quarter. But what I do here is as kosher as a Wolfies hot corned beef sandwich on rye. So not to worry.

The first thing I noticed is that the annualized value of real GDP reached $16.2 trillion in 2014 Q3. Now that is a pile of stuff. Back in 1999 Q3 Real GDP was $12.1 trillion. So in those 15 years we increased national output by about a third. Even if we compare today’s output to 2007 Q3 right before the recession started, we are enjoying 7% more than 7 years ago.

7% more in seven years is nothing to write home about but it does establish that even after a major recession and an ensuing slow growth period, we are producing a large amount of output today – considerably more than the outputs of the past.  Again – I am not making a case that things are wonderful in Macroland. But the most recent data establishes the fact that we are producing more than ever.

That fact might not be surprising but it gets a lot more fun when you bring out the Hookah. Err I mean the rest of the data. As you probably know, real GDP has several major components – based on the buyer – households, firms, governments, and the foreign sector.

So let’s see how these sectors contributed to the larger amount of production in the USA. That is, who is responsible for buying about a third more when we compare 2014 to 1999? I summarize with the table below.

The table has component shares of Real GDP. If the share of a category was 10% in 1999 and then 10% again in 2014 – that means that that buying by that group kept up with GDP. The share did not change in those 15 years because it kept up. So in the final column in the table – a POSITIVE SIGN means that category was growing FASTER than Real GDP in those 15 years. A NEGATIVE SIGN means it grew SLOWER than Real GDP. 

What do we see from the table? First, we definitely have unbalanced growth. Second, while consumer good spending was a leading sector, the growth was coming mainly out of durable consumer goods like autos. Spending on nondurable goods like food and clothing did not keep up with RGDP as its share of spending fell. Third, while the federal government purchased a larger share of the nation’s output, state and local governments’ share fell by 2.7%. Finally and perhaps most importantly, gross private domestic investment’s share fell from 18.5% to 16.8% of GDP. Yes spending increased, but it grew considerably slower than real GDP for the last 15 years. As you know this category is the key to future innovation and productivity. While there was a marginal increase in the share of business purchases of equipment, it was the structures part of investment that lagged. Similarly on the retail side, residential housing’s share fell by 2.2% of Real GDP. Finally while exports' share rose by 3.5%, imports share rose by 2.7% and therefore net exports increased by only 0.7%.

Keep in mind that Real GDP increased by about 33% in 15 years. But that amounted to an average of less than 2% per year. All those categories in the table with a MINUS sign, therefore, grew more slowly than 2% per year. The slow growth economy of the last 15 years essentially was propelled by the Federal government (shares of defense and non-defense increased by similar percentages ) and household spending on durable goods and was held back by State and Local Government spending and the construction of business and residential buildings.

One could conclude the slow economic growth was caused by a highly unbalanced growth and recovery. One could also conclude that whatever policies offered to promote recovery have not worked. The Keynesian spending multiplier is premised on the idea that while stimulus might be aimed at a single sector, the results would spread across the economy. Such has not happened and it might help if policymakers try to understand why.

Table. Share of Real GDP in Q3 in 1999 and 2014 and Change
from Q3 1999 to Q3 2014
                                               1999  2014  CHG
Exports                                      9.7   13.1     3.5
PCE                                         64.6   67.9     3.3
Durable Goods                          5.9     8.8     2.9
Imports                                    12.9   15.8     2.7
Investment in Equipment          5.6     6.3     0.7
Federal Government                  6.8     7.1     0.3

State and Local Gov.               13.6   11.0   -2.6
Residential Investment              5.3     3.1   -2.2
Investment in Structures           4.1      2.8   -1.7
Gross Private Investment        18.5   16.8   -1.7

Non-Durable Goods                14.9   14.6   -0.3


  1. So, while some say that the economy is growing at 3%-4%, the wrong sectors are driving the growth and skewing the numbers?

    1. Thanks Fuzzy. Not necessarily the wrong sectors. But sooner or later the growth needs to more balanced. Like a weightlifter who only did curls with her left arm. At some point that could become a problem.

  2. Dear LSD. This one is sympathetic to your statement, “ . . . . that whatever policies offered to promote recovery have not worked.” But, in defense of the defenseless and feckless administration, shot-gun econ stimulation could not have energized all economic sectors equally—some inherently are more elastic than others—particularly where government spending outpaces private spending: that’s inherent imbalance from the get-go. So, imbalance in—imbalance out. You can’t blame a duck for doing what ducks do so it would be inappropriate to blame the feckless administration for doing what it didn’t know it was doing. (Geese, my tongue is getting awfully cramped in my cheek.)

    Maybe the new Congress will understand they are not economists or central planners and adopt a benign hands-off policy toward econ growth. Hm-m-m-m, that soundz awfully like free-market stuff. What a refreshing thought, eh?

    1. Thanks Charles. Two comments back to you. First, it is good that you elaborate the impact policies had on this unbalanced slow growth. Second, Keynesians would argue that the lack of growth was because government didn't provide enough stimulus. They believe that once you stimulate some sectors, the rest will follow because of the spending multiplier. So while I agree with you neither one of us is going to persuade the followers of Krugman, Blinder, and other progressives. They want more stimulus even 6 years later...Not sure free market stuff has much of a following out there even among Republicans.

  3. This comment is from Bill W.


    What if the 2014 shares are optimal for current conditions? If so, the fact that growth since some past point has been unbalanced seems either irrelevant or perhaps even a positive. I can see no reason why sectors should grow in lockstep over any particular period.


    1. Hi Bill, Happy Thanksgiving. I am not calling for lockstep. I am noticing that after 6 years the economy is basically limping along with long arms and short legs. It could have been exacerbated by policy or maybe this is a natural result of the large financial crisis. But I don';t think it is normal and we won't see strong growth return without more balance.