The Wall Street Journal
Growth is about half as strong as it was after the last deep downturn.
President Obama yesterday hailed the first quarter growth rate of 3.2 as an important milepost on the road to recovery and lets hope hes right. From our own current vantage point the first quarter numbers reveal a respectable cyclical recovery though one that is so far less robust than wed expect after an especially deep recession.
Which is not to say the growth isnt welcome. The quarter is the third in a row in which the national supply of goods and services expanded after an entire year of contraction and the report contained some good news. The American consumer who was supposed to have gone on strike increased spending by 3.6 the most in three years. Americans are recovering their spending confidence. Inventories also continued to rebound accounting for 1.57 of the 3.2 growth total another sign of a normal upward turn in the business cycle.
On the down side fixed investment in the likes of capital goods and buildings added little to growth. This is surprising given buoyant corporate profits though perhaps investment will pick up as residential housing and commercial real estate recover later in the year. This all means the economy is growing but still not firing on all cylinders. Consumer spending will only remain brisk if the economy starts to create more new jobs than it has so far.
.We expect better job creation this year than many economists are predicting but its notable that White House economist Larry Summers warned yesterday that joblessness is likely to be an enduring problem even as the economy grows. White House aides dont tend to broadcast such pessimistic thoughts in an election year without cause.
One way to judge the strength of a recovery is to compare it to the growth after downturns of similar severity. The best recent comparison to the recession of 2008-2009 would be that of 1981-1982. They had different causesinterest rate increases in 1981 and a financial shock in 2008but both periods had steep declines in output and jobless rates that hit 10.
The 1982 recession officially ended in November and the recovery came roaring out of that year gaining momentum throughout 1983 and carrying 8 growth into 1984 with an expansion that lasted six more years. The nearby table shows the growth rates in the first four full quarters after the recession ended.
By comparison to that boom the current recovery has been about half as strong. The arbiters of the business cycle at the National Bureau of Economic Research still havent officially called the end of the 2008-2009 recession though the economy has been growing for at least 10 months. Considering how far the economy fell in 2008 and 2009 and considering Washingtons extraordinary monetary and fiscal reflation this recovery is much less impressive than that of 1983.
The stock market has been signaling more growth ahead and the last two recoveriesafter the mild recessions of 1991 and 2002also started slowly but eventually gained steam. Perhaps that will happen again. One advantage this time over 1983 is that the emerging economiesChina India and Brazilare now so much larger and are growing much more rapidly.
But its also worth noting another less than favorable contrast with the recovery of 1983: government policy. The full incentive-enhancing impact of the 25 Reagan reduction in marginal tax rates finally kicked in on January 1 1983 and Paul Volckers Federal Reserve was starting to cut interest rates from the record highs that broke the back of inflation while causing the recession. At the same time an era of deregulation was lowering costs across most industries. The groundwork for a durable expansion had been laid in lower taxes lower inflation and lower business costs.
In the current recovery the policy headwinds are very different. Taxes are set to rise significantly on January 1 2011 and the political class is signaling the need for still more taxes to pay for the costs of stimulus and the expanding entitlement state.
As for monetary policy the Fed has held short-term interest rates at close to zero for 16 months. The only question is how soon and how high rates will rise. Meanwhile Washington is raising costs for business by expanding its regulatory reach via tougher antitrust enforcement mandates on health care and energy more political limits on telecom investment restrictions on bank lending and much more.
The White House bet is that the Great Reflation that began in December 2008 has ignited a recovery that is strong enough to blow through these obstacles and become another long-lived expansion. We certainly have a decent recovery. Regarding its strength and duration the jury is still out.
