Make America Grow Again
The economy is stuck on 1% growth as business investment stalls.
Republicans in Cleveland were accused of being overly “dark,” and Democrats in Philadelphia (or at least some of them) tried to convince voters that the economy is better than they think it is. But the diminished opportunities that most Americans experience in their own lives is also reflected in the official statistics, which on Friday showed that the economy grew in the second quarter at an annual rate of only 1.2%.
The meager growth took most economists and Wall Street analysts by surprise, coming in at less than half the consensus forecast of 2.6%. The Commerce Department also revised growth down for the first quarter to 0.8% from the prior 1.1% estimate and the fourth quarter of 2015 to 0.9% from 1.4%.
This means that since last September the economy has pumped the brakes from the 2.2% average from 2012-2015 into a near-stall speed of about 1%. Seven years after the recession ended, President Obama on Wednesday took credit for an economy that he called “stronger and more prosperous than it was when we started.”
Talk about a low bar. When he started, the economy was in recession. The President didn’t mention that the current recovery, the one on his watch that began in June 2009, is easily the weakest since World War II.
The second quarter suffered in particular from the same malaise that has marked nearly the entire Obama era—poor business investment. Consumer spending rose smartly at 4.2% in the second quarter, but business investment fell at a 2.2% pace, and companies ran down inventories for the fifth consecutive quarter.
The nearby chart shows the quarterly contribution to GDP from private “nonresidential fixed investment” since 2013. Business spending on the likes of new factories, equipment and software has subtracted from growth for three straight quarters. Apart from a stretch in 2014, the last three years have been historically weak.
This matters because business investment spurs the growth and productivity gains that produce more jobs and higher wages. As resilient as consumers have been, they can’t drive growth by themselves.
Most CEOs will be risk-averse and conservative with their balance sheets until they see signs of a growth rebound, even though they’re sitting atop piles of cash and the cost of capital is at all-time lows. They will also hold off investing until they have a better sense of the future tax and regulatory burdens they are likely to face next year.
They can’t be re-assured by what they heard in Philadelphia, where the Obama-Clinton Democrats promised more of the policies that have stifled growth the last eight years. “Wall Street, corporations and the super-rich are going to start paying their fair share of taxes,” Hillary Clinton declared.
Start? The richest 1% already pay about 38% of federal income tax revenue. And perhaps Mrs. Clinton will disclose which sage economic advisers have told her that raising taxes on business will yield more business investment. We were taught that if you tax something you get less of it. Mr. Obama’s unprecedented wave of regulatory costs is another main reason business isn’t investing. Yet Mrs. Clinton promised more costly rules on finance, health care, drug prices, mandated wages and benefits, and more.
Normally all of this would help the party that doesn’t hold the White House, but Donald Trump is talking more about law and order and terrorism than the economy. His two main economic themes are restricting the labor force with immigration controls and raising the prices of imports with new tariffs. Both would harm the economy. As it happens, an upturn in net U.S. exports added 0.23 percentage points to GDP in the second quarter.
Mr. Trump does say he’ll reduce regulation and cut taxes, but he offers few details and these are hardly his main talking points. In his Cleveland acceptance speech, he mentioned them almost as an afterthought.
About the only serious pro-growth agenda on offer is the House GOP’s “Better Way” that would reform the business tax code, ease rule-making and otherwise remove barriers to investment and job creation. The Tax Foundation estimates the package would make the economy about 9% larger and lift wages by 8%. Maybe Mr. Trump should read it.
The alternative is another lost decade of slow growth, which will lead to more economic anxiety and thus more political unrest.