Are We Finally Getting Back To Trend? Probably Not.

by Zach Bethune, Thomas Cooley and Peter Rupert

GDP Report

The BEA advance estimate for real GDP in the 2nd quarter increased at a saar of 3.948% (the BEA has written 4.0% in their actual release).  This is a welcome estimate after the negative growth rate in the first quarter. Real GDP is now estimated to have contracted by 2.1% in the First Quarter of 2014.  The largest contributions to the turnaround was the swing in investment and a big part of that came from inventories which accounted for 1.5 percentage points of the growth. Consumption increased by a healthy amount after declining in the first quarter.

gdprealchgm-2014-07-30

This is a strong and encouraging report but the larger issue is whether it portends a return to more typical growth rates.  Perhaps the biggest topic of discussion among policy makers and observers is whether the U.S. is stuck in low gear and why. GDP is still lagging significantly below its post-war trend  of steady 3% growth and is showing no signs of catching up (figure below). The FOMC has lowered its central tendency of long-run growth to 2.1-2.3%. In addition, low investment, low labor force participation rates, a decline in immigration of skilled workers are all factors that seem to suggest a less dynamic economy.

rgdp-level-2014-07-31

A look at this recovery in comparison to previous recoveries suggests that we may be stuck in a low growth equilibrium as many commentators have warned. The chart below shows the average rate of growth from the trough to the peak over all previous business cycles going back to 1949.  The last bar represents the current recovery.  With yesterday’s strong GDP report we are now growing at an average rate of 2.1% over this recovery.

expansion-growth2014-07-30

Looking back we see that growth rates of  4% or more were common in earlier recoveries and while there certainly seems to be a long slow-down in growth, none of the recoveries was as tepid as the current one. This does not bode well for the future.  On the one hand, given this tepid recovery it is easy to understand why the Fed is continuing to keep its powder dry with respect to monetary policy even though there is a growing chorus of dissenters. On the other hand, the figure above might suggest there isn’t much the Fed can do to bring output back up to trend, and keeping the punch bowl out too long is as dangerous as pulling it away too quickly.

Below we show our “Snapshot” style figures for GDP, Consumption, and Investment. As always, the entire Snapshot is available from the link on our homepage.

rgdp-2014-07-30 (Peter Rupert's conflicted copy 2014-07-30) cons-2014-07-30 (Peter Rupert's conflicted copy 2014-07-30) inv-2014-07-30 (Peter Rupert's conflicted copy 2014-07-30)

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