Sluggish GDP Growth

First quarter U.S. GDP will be reported on Wednesday morning April 29th; the consensus is for only one percent real growth.  The last few years have been marked by poor GDP growth. The chart compares actual GDP to potential GDP and shows that six years after the Great Recession GDP remains well below its potential.   In the 22 quarters since when the recession ended in June 2009, GDP growth touched 5% only once; since 1980 GDP growth was 5% or higher in 16% of quarterly reports.  Growth is sluggish.


Among theories of why growth is slow, three stand out: too much debt, weak demand and slow labor force growth:

The amount of debt – government, household and corporate – in the economy surged before and during the financial crisis.  After the Great Recession, efforts to work down debt levels limited spending and investment and prevented a strong rebound.  Some analysts would describe the 2007-9 recession as a “balance sheet recession” meaning that high debt severely damaged balance sheets and companies and households were forced to devote any funds to debt service rather the spending.  Debt levels in the US economy have come way down. Households currently spend a record low percentage of income on debt service, corporate balance and earnings are much improved and the federal deficit is down to normal levels.  While there may be some remaining concerns about taking on debt – or extending credit – in the US, debt levels are not the only cause of sluggish growth.

In the depths of a recession, everyone hunkers down, stops spending and saves as much as possible, The paradox of saving – what makes sense for individuals, families or companies confronting hard times, can spell disaster for the economy.  The vanished spending makes the economy worse off.  With little or no spending or investing, a capitalist economy won’t grow.  In most recoveries, the pain of the recent recession is forgotten fairly quickly and growth resumes. This time the recession was far deeper and nastier and it is taking longer to put it behind us. Until a few months ago few believed that the unemployment rate would approach 6%; now it is 5.5%.  Lingering concerns from the Great Recession are still with us and may be deterring some spending and contributing to weak GDP growth.

Fewer people in the labor force and working means less production and slower GDP growth. The US labor force is growing less rapidly now than before the last recession. One factor is the aging of the baby boomers – people born between 1946 and 1964. The oldest among them are reaching retirement age.  A second factor is a drop in labor force participation – people of all ages seem less likely to hold jobs or look for work than was the case a decade or more ago.  While the aging of the population is easy to explain, the drop in labor force participation is a bit of a puzzle.  One possible factor is declining real wages – adjusted for inflation wages are flat to down and the returns to working, or working longer hours, may not be there for everyone.

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