GDP Growth in the Recovery Remains Slow, But Policies Are Not Holding Back Business Investment

GDP growth in the economic recovery from the 2008 collapse remains weak.  The recently released GDP figures for the second quarter of 2011 (second revision, from the Bureau of Economic Analysis of the Department of Commerce), revises downward the growth estimate to 2.0% from the previous estimate of 2.5% (all figures are quarter on quarter growth, seasonally adjusted at annual rates).  While still positive, and better than earlier in the year, such growth is insufficient to bring down the still high unemployment to a significant degree.

Four points:

  1. The overall GDP growth rate would have been 1.55% points higher (i.e. a more decent 3 1/2%) if the change in private inventories had remained the same as it had been in the second quarter of 2011.  Over time, the contribution to GDP growth from inventory accumulation is on average close to zero, so one would expect that over the next couple of quarters this will switch back to positive from negative to balance out desired inventories.  Note that the contribution to the growth in GDP in any period is the change in the change in private inventories.  Private inventories did not fall in the third quarter of 2011:  they merely failed to grow as fast as they had in the second quarter.  I will try to prepare a methodology note discussing this arithmetic at some point in the future, and post it in the Econ 101 section of this blog.  (Update:  It is now posted here.)
  2. Obama has been strongly criticized by Republicans that his policies have been anti-business, and hence have led business not to invest, with this then resulting in the disappointing growth of GDP.  But the figures do not support this.  Business investment has in fact been quite good, as seen in the figure above, with growth of 15% in the most recent quarter, and generally quite strong growth since the beginning of 2010.  This is especially surprising as capacity utilization (as estimated by the US Fed) is still only 78% of potential capacity (and while never at 100%, this figure will be at around 85% when the economy is close to full capacity utilization).  Business is investing even with the current excess in capacity.
  3. An economic headwind that has been hurting growth, starting in late 2010 and then into 2011, has been the fall in government demand.  This has principally been from cutbacks in state and local governments.  If government demand had simply not been cut, GDP growth would have been about half a percentage point higher than what it was from simply the direct impact of the government cut-backs, and even higher if multiplier effects are included.
  4. And, perhaps stating the obvious, while Obama is now being blamed for the downturn, the critics need to be reminded that the sharp collapse in output came in 2008.  This was then turned around in 2009, after Obama took office, with growth since.  The growth has not been fast enough, and the economy remains well below its potential capacity, but reverting to the previous policies is the last thing one should do.