Scratching Just One Level Below Surface, Growth Numbers Look a lot Less Impressive
The last six months of 2013 saw the headline GDP growth rate reach 3.7 percent. That’s a healthy number. Not gangbusters (we really have seen growth rates over 5 percent for a year or more in previous recoveries where there was slack in the economy comparable to what persists today), but undeniably healthy.
So what’s to be glum about?
Strip out the contribution of inventory investments and exports, and add in (rather than subtract) the value of imports. This is a measure of real “final sales to domestic purchasers,” or, what is sometimes called domestic demand. It’s a measure of how much demand from households, businesses, and governments is growing—and since the economy’s problem remains a huge shortfall of this demand relative to productive potential, it’s a key barometer of health.
Domestic demand growth for the last six months of 2013 was only half as fast as headline GDP growth (1.8 percent).
Key evidence that this slow rate of domestic demand growth is keeping us from making good progress in closing the gap between aggregate demand and potential supply (and closing this gap really should be the operative definition of “full recovery”) is the stubbornness of core price growth—the year over year change in the “market-based” deflator for core (i.e., excluding food and energy) price deflator for personal consumption expenditures was 1.1 percent for the last three quarters of 2013. This is well below the too-conservative target of 2 percent inflation often assumed to be guiding monetary policymakers. In short, this is a clear sign of an economy not climbing rapidly back to full employment.
Are there any reasons to be less glum about 2014? For sure.
The big one is that federal fiscal policy will no longer be actively throttling growth. It knocked nearly a full percentage point off the fourth quarter growth rate. To be clear, fiscal policy won’t aid growth in 2014, instead it will provide a very slight drag rather than an anvil-heavy drag. This is what counts as progress in today’s fiscal policymaking. But, we’ll take what we can, I guess.