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REVIEW & OUTLOOK
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April 27, 2012, 6:50 p.m. ET
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The Growth Deficit
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The slowest recovery plods along
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The weakest recovery on record continued in 2012's first quarter, with the Commerce Department's Friday report of 2.2% growth. That's down from 3% at the end of last year, but closer to the 1.7% for all of 2011. It's enough to give the word recovery a bad name.
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The economy has been growing for 11 quarters since the recession officially ended in mid-2009, and quarterly growth has averaged 2.4%. That's slower growth than in every modern expansion, and about half the growth rate of all recoveries since World War II, according to Congress's Joint Economic Committee. The first 11 quarters of the Reagan expansion in the 1980s, by notable contrast, grew an average of 6.1%.
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The details in the first quarter report help explain the growth deficit. Consumers have been spending (up 2.9%), but businesses weren't investing (down 2.1%). Car and truck sales riding pent-up demand from the recession accounted for half of the increase in GDP.
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This suggests more consumer confidence, but an upside-down recovery with questionable durability. Business capital investment in big ticket items such as plants, equipment and computers is one of the best forward-looking economic indicators. Consumers can't keep up this spending pace if businesses aren't investing to create new technologies or improve productivity.
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Consumers also can't continue to spend faster than their incomes are rising. Real disposable income rose by 0.4% in the quarter, but real disposable income is only up 0.6% in the last 12 months, as higher food and energy prices have sapped middle-class purchasing power.
The growth numbers were also somewhat inflated by businesses building up inventories, which accounted for about 0.6 percentage points of GDP growth. Over the last six months businesses have stocked up by more than $120 billion, which could presage less spending in the months ahead to move those products off the shelf.
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The good news in the report is that government spending receded for the fifth straight quarter, down 3.1% in the last three months. Remember this is coming off the gigantic rise in the base level of government in 2009 and 2010. Private growth was a more respectable 2.8%.
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Keynesians decry this decline in government spending, but they're the ones who said we needed the "temporary, targeted" demand-side spending blitz. Flood the economy with government spending for two years, then pull back when the recovery is underway, they said. The problem is we never got the roaring recovery they promised.
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Economist David Malpass reports the startling fact that over the last year U.S. GDP has grown by roughly $600 billion but federal debt has climbed by $1.3 trillion. This is hardly "austerity," and it explains why the U.S. debt to GDP ratio is climbing so fast.
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The big picture is that this has been a traditional debt and spending demand-driven recovery, which typically has less staying power. The Obama Administration rejected supply-side incentives of lower tax rates and fewer regulatory burdens to boost noninflationary private output.
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There's more danger ahead, as the tax-increase cliff approaches at the end of this year. Even liberal economists and Treasury Secretary Tim Geithner are suddenly warning about the big tax increases that will hit the economy, but they are the ones who insisted that tax cuts be temporary. They created the cliff we may all leap off. President Obama says tax cuts don't work, but he has never explained why the Reagan recovery that followed policies Mr. Obama rejected was so robust while the current recovery is so anemic.
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A new Fox poll finds that 83% of voters think the country is still in a recession. It isn't, but it's understandable if Americans feel that way.
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