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Friday, October 29, 2010

U.S. economic growth still feeble -- a look at the numbers

As reported here, the U.S. Commerce Department has stated that third-quarter economic growth in the country was higher than expected, but still not that high:
The economy grew slightly faster last summer as Americans spent a little more freely. Yet it remains too weak to reduce high unemployment just as Democrats face deep losses in Tuesday's elections.

The Commerce Department said Friday that the economy expanded at a 2 percent annual rate in the July-September quarter. It marked an improvement from the feeble 1.7 percent growth in the April-June quarter.

Consumers helped boost last quarter's economic growth with 2.6 percent growth in spending. That was better than the second quarter's 2.2 percent growth rate and marked the biggest quarterly increase since a 4.1 percent gain at the end of 2006 before the recession hit.
A great place to go to get a better perspective on this is the website Trading Economics, which allows you to chart all sorts of economic indicators from around the world.

So let's compare GDP growth rates from this recession as compared to the dire recession of the early 1980s. According to Wikipedia's handy list of recessions in the U.S., the "Great Recession" lasted from Dec. 2007 to July 2009 -- a total of 18 months. The second and more drastic of the early 80s recessions lasted from July 1981 to Nov. 1982 -- that would be 16 months, though keep in mind that the economy was coming off of a short recession that occurred in 1980.

So here we are in October (nearly November) 2010 -- a full 15 months after the official end of recession. So let's plot a graph of the U.S. GDP growth rate that takes us back four years to November 2005, to a time when the economy was supposedly growing quite nicely:

Of course we only get data as it comes in by quarter, so the first figure here shows up on January 2006 (which represents the fourth quarter of 2005).

Here we see that GDP spiked to near 6% growth in early 2006.  For much of the rest of the period, it hovered between 1% and 3%, dipping down to 0% in late 2006.  We then see the big dip that occurred during the recession, followed by a short spike in growth at the start of 2010 (i.e. Q4 2009).  As of now, the U.S. is back into a slow growth phase (note that today's 2% rate does not appear on the chart).

Now, let's look at a similar time frame for the early 80s recession.  15 months after the recession ended would take us to February 1984.  Going back five years to February 1979, we get a GDP growth rate chart that look as follows:

Here the situation is much more erratic, due in part to the short 1980 recession I mentioned earlier.  Growth prior to that short recession hovered between 0% and around 3%.  We then get a sudden dip in growth, followed by a huge spike up to around 7-8%.  The second recession hits, but then we get a tremendous rebound -- throughout most of 1983 GDP growth was approaching the 10% mark.

What does this tell us? Well, first off, the current recovery is not going quite as well as previously expected. This is something that we already know. Yet it is worth examining exactly how sluggish our recovery is at the moment. The 1983 rebound saw GDP growth approach double digits.  So far, the post-Great Recession growth rate has not gone beyond 5.7% (see here).  Since then, of course, the recovery has stalled, and GDP growth has dipped down to the 2% range.

But there is something else worth noting here. We tend to talk about the supposed boom years of the mid 00s that preceded the last recession. But was GDP growth all that great? If you look at both graphs, you'll see that growth in 2006 and 2007 sometimes dipped down quite sharply, and that the Q1 2006 figure is the only one that is significantly high.  Growth in the years leading up to the 1980 recession was not terribly different (note that the graphs use different scales, so that the 80s figures look less impressive at first glance).

In fact, let's take a look at growth through the second half of the 1970s. The brutal "stagflation" recession of the mid-70s officially ended in March 1975. So let's plot GDP growth from that point to February 1979:

Again, the situation is rather erratic.  But note how high the GDP growth rate rose in the years following the mid-70s recession.  Q4 1977 stands at 0%.  And there was a dip down to the 2-3% range in the second half of 1976.  Other than that, however, growth was rather significant, ranging from 5-10%, and soaring past the 15% mark in Q2 1978.

What does this tell us? Well, despite our current impressions, growth in the mid-00s was not exactly record-breaking (you can check out the entire decade for yourself if you wish, but the story is generally the same in the years following the 2001 recession). Considering how much of that growth was built on a house of cards that stood atop a crumbling housing market, those figures should be even more sobering. What exactly were we all doing in the 00s? More importantly, where will future growth come from, given that pre-recession economic growth was so unimpressive?

Of course GDP is only one economic indicator. I'm not trying to say that things were "better" in the 70s than they are now -- by most measures that is not true. But this does give us a good idea of the problems that lie ahead in terms of achieving true economic recovery.

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