Continuing the Slump

After the housing bubble, job growth and GDP growth are low, and increased business investment isn’t enough to energize the economy.

All signs point to an economy that has struggled and that is increasingly under downward pressure. Employment, GDP, and business investment numbers released within the past week all show the American economy falling solidly behind where is should be at this point in the recovery from a recession.

Labor statistics released this morning report that only 92,000 new jobs were created in October, which is well below historical averages. During the entire business cycle, which started in March 2001, job growth has been lees than one fifth of the average of previous business cycles. And only a scant six months out of the past 67 in the business cycle have had above-average job growth.

This is underscored by lagging wage growth, which statistics released last Friday show slowed from a 3.2 percent increase in the second quarter to a 2.3 percent increase in the third quarter. And total compensation growth slowed even faster, from a 3.4 percent increase in the second quarter to only a 2.2 percent increase in the third quarter.

New Gross Domestic Product numbers, the most common measure of overall economic activity, were released last Friday, showing the economy growing at an annualized rate of 1.6 percent—the slowest growth rate since the first quarter of 2003. The widening trade deficit, which grew to the highest level since the BEA began keeping records in 1947, and a severe decline in the housing market, with spending on new homes and home improvements dropping by an additional 17.4 percent, both added to this slow rate of economic growth.

The bright spot in last week’s GDP numbers was the solid expansion of business investment. This sector increased by 8.6 percent in the third quarter, which included strong growth in structures and equipment investments and commercial construction investments. However, business investments are not growing at a rate comparable to this point in past business cycles.

The Bush administration sold their corporate and personal income tax reductions as forerunners to increased overall investment. Business typically recovers strongly from a recession, but investment in this sector has only increased 7.7 percent during this business cycle, which is 12.4 percentage points lower than in the average of past business cycles.

The sharp end to the housing boom will likely keep exerting downward pressure. There has not yet been a replacement motor to drive the economy. All other sectors have either failed to grow fast enough to compensate for the decline or have created an additional strain on the economy.

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Christian E. Weller

Senior Fellow