New GDP Numbers Don’t Surprise: Fiscal Austerity Isn’t Helping the U.S. Economy
Nearly five years after the collapse of the investment bank Lehman Brothers and financial giant AIG, the U.S. economy is still struggling to attain growth capable of ending unemployment and boosting family incomes—at least for those residing below the utmost heights of America’s income scale.
Bureau of Economic Analysis data released this morning show that the growth of U.S. gross domestic product, or GDP—the sum total of goods and services produced by workers and capital in the United States—reached 1.7 percent in the second quarter of 2013, up from 1.1 percent in the first quarter. The four-quarter trend stood at a paltry 1.4 percent, down from 2.8 percent last fall, before the “fiscal cliff.” Today’s report also provided new estimates for all measurements of GDP dating back to 1929.
No one should be surprised that growth is muddling along at this anemic pace. This was the predictable outcome of the across-the-board spending cuts that have been in effect since March, as well as other mounting fiscal austerity, wrought by deficit hawks in Congress in an ongoing political struggle following the 2010 midterm elections.
It is important to note that the choice to cut public spending, which is undermining economic growth, was a deliberate political calculation made by leadership in the Republican-led House of Representatives. House Speaker John Boehner (R-OH) said last week, “Is anybody in the Congress more focused on cutting spending than I am? I don’t think so.”
Blindly cutting spending, it turns out, is not a ticket to national economic prosperity. If Congress reversed these spending cuts starting tomorrow, the U.S. economy would grow 0.7 percentage points faster and add nearly 1 million additional new jobs over the next year, according to new analysis from the Congressional Budget Office.
The catch, however, is that Congress heads off to vacation this week and is only scheduled to sit in session nine days when its members return in September, though it will need to renew spending authority by the end of September to avoid a government shutdown. If past political performance is any indicator of future behavior, the push for even more hawkish spending cuts is going to mean a bumpy ride ahead for economic growth and job creation. Already, 15 Republican senators have pledged to shut down the government over health care spending. And that’s before we need the House to raise the debt ceiling, lest the United States yet again be threatened with a forced default on its bond obligations sometime in October.
Since 2010 public spending at all levels of government on public services and investment has shrunk by $167 billion (after inflation) and has decreased by more than 2 percentage points of GDP, as today’s data release shows. Reversing the ill-advised spending cuts is a no-brainer way to boost the economy, literally today. Elsewhere, however, the GDP report shows a U.S. economy structurally falling short of its potential.
Personal consumption, alone accounting for approximately 70 percent of GDP, grew 1.8 percent in the second quarter of 2013, down from growth of 2.3 percent in the preceding quarter. Still, this consumption is being led by dividend payments earned by stock owners—only 15 percent of the population, heavily skewed toward the wealthiest share—according to Federal Reserve estimates. Although average total compensation in the economy overall is rising, we know that income growth is accruing only at the very top, as other Bureau of Labor Statistics data show that hourly wages for median workers and production workers have been basically flat after inflation for years now.
The shockingly unequal benefits of income growth constrain business investment and hiring as well as household spending. Business investment in productive equipment and facilities grew 4.6 percent in the second quarter, a pace slightly more than half as fast as in earlier recoveries from recessions. A monthly survey of the nation’s small businesses, conducted by the National Federation of Independent Business, or NFIB, showed that the most important reason for these businesses’ ailing earnings in July was weak sales volumes. While taxes and regulation are always concerns of business owners, the NFIB survey shows that the number of firms reporting weak sales as their number-one obstacle to business growth remains historically high.
Residential investment did jump by 13.4 percent in the second quarter, driven largely by institutional investors rather than by home-occupant buyers. Forthcoming research from my Center for American Progress colleague Sarah Edelman shows the surprisingly large share of recent home purchases paid for in cash—as many as 60 percent in Las Vegas—rather than financed through personal mortgages. Although Census Bureau data suggest that housing vacancies are stabilizing, creeping interest rates are likely to eat into residential investment demand in the near term.
In America’s international economy, the trade deficit widened in the second quarter as exports grew 5.4 percent but imports—of an already much larger volume—grew nearly doubly fast at 9.5 percent, according to today’s release, even though China’s net exports, making up 43 percent of the total U.S. trade deficit, have slowed markedly over the past year.
As the U.S. economy is growing slowly and producing prosperity only for a privileged minority of the population, policymakers should look to a new model for how to achieve economic progress—one based on the evidence that the more than 300 million people in working families are the true engines of economic growth and job creation. But before we can tackle those economic challenges, we will need Congress to grab the low-hanging fruit of at least reversing the misguided spending cuts that are set to cut even deeper as we move into the second half of this year.
Adam S. Hersh is an Economist at the Center for American Progress.
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