Last week we looked at how we measure growth in the economy using GDP. Today we discuss how fast GDP has been growing since the end of the recession. Hint: not so hot.
It makes sense to pause and assess how well the economy has expanded since the recovery began in June of 2009. According to the Bureau of Economic Analysis, real GDP growth has averaged 2.2 percent annually over the four years since the end of the Great Recession.
That number might not mean a whole lot without some context. The long-term average annual rate of growth in the United States since the end of World War II is roughly 3 percent, including all the booms and busts in the intervening years, making the post-crisis record seem pretty anemic by comparison.
But that does not tell the whole story. We generally expect even more robust growth in the first few years following periods of weakness, as economic
activity rebounds from abnormally low levels. For all the post-war recoveries until this one, GDP grew at an average annual rate in excess of 4 percent, meaning that this recovery is only half as strong as one would normally expect following a significant downturn. In fact, the total output of the US economy is roughly $1.3 trillion below the level one would normally expect at this point.
Why so weak? The non-partisan Congressional Budget Office produced an excellent analysis that breaks down the sub-par performance into two main factors.
First, there has been a long-term structural decline in the U.S. economy's basic capacity to grow. This inherent capacity is called potential GDP, and is essentially how fast we could expand if the economic engine was firing on all cylinders, given the current policy mix. Challenging demographic factors like the aging of the baby boomers, the slowing of the dramatic surge in women entering the job market, and the spike in discouraged workers leaving the workforce have reduced the available pool of skilled labor, limiting potential output.
Meanwhile, we have experienced a significant decline in the rate of productivity growth, thanks in part to weaker capital investment. Add in an obsolete and uncompetitive corporate tax code and an increasingly stifling regulatory burden, and the economy's basic ability to grow when it is healthy is materially reduced. CBO estimates that this explains about two-thirds of the weakness in the recovery.
Secondly, the economy is not yet healthy. The difference between potential GDP and the current actual level is called the output gap. This gap or deficit in output is much larger at this stage than in previous recoveries, owing largely to the severity of the financial disruption experienced during the financial crisis. This gap is closing gradually, but will still require several years to fully heal. This factor is responsible for about one-third of the slow comeback.
As the output gap continues to close, our attention must be focused on the depressed level of potential GDP. It need not be accepted as a given; policy changes are possible to shift the trajectory. Obviously we cannot alter the demographics, but structural tax, immigration and regulatory reforms are within our capability that could bend the growth curve back up. If we are unwilling to take on these challenges, then we must adjust to permanently lower growth.
Christopher A. Hopkins, CFA, is a vice president for Barnett and Co.
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