Yes, GDP Is Up. But the Recovery Hasn’t Broken Through.
This post originally ran on the Wall Street Journal‘s Think Tank blog.
The Commerce Department’s Bureau of Economic Analysis reported Thursday that gross domestic product–the widest measure of U.S. economic activity–grew at an annualized rate of 3.5% in the third quarter. For the past six months GDP has been growing at a rate of 4.1%. If sustained, this would clearly constitute the recovery shifting into a higher gear.
Sadly, there’s not a lot of evidence that it will be sustained.
For one thing, even with the expansion in the two most recent quarters, growth so far in 2014 has averaged just 2%. Much of the growth in the past six months likely represents bounceback from the 2.1% contraction in the first 3 months of this year.
For another, about 2 percentage points of the third-quarter growth came from an increase to defense spending and a rise in net exports. There is nothing wrong with this; it is real production. But it is extremely unlikely to persist. We all know that fiscal policy is not forecast to be a big boost to growth going forward. (It was a large drag on growth in recent years, so this move to “neutral” actually constitutes improvement.) And net exports have been awfully volatile over the recovery. They contributed 1.3 percentage points to the third-quarter growth rate. But they subtracted 1.7 percentage points from the first-quarter growth rate and subtracted 0.34 percentage points from second-quarter growth. Given weakness in the rest of the global economy, net exports are likely to contribute zero to economic growth over the coming year–and that might be optimistic.
Further signs that the economy is not quickly working off productive slack can be found in price data. The “market-based” price index for core personal consumption expenditures (i.e., excluding food and energy) rose just 1.3% over the past year. That’s well below the Fed’s 2% inflation target.
Since the recovery from the Great Recession began more than five years ago, GDP growth had, until now, essentially averaged between 2% and 2.5%. Once one properly discounts the information provided by the noisier elements in Thursday’s GDP data, there’s little reason to think that has changed.