Stable Economic Footing Should Focus Agenda on Inclusive Prosperity
SOURCE: AP/ David Zalubowski
Economic growth is returning the United States to more stable footing, but stronger growth is not translating into the dream of widely shared prosperity and opportunity for all Americans, articulated this week by President Barack Obama during the State of the Union address. U.S. gross domestic product, or GDP—the sum total of goods and services produced by workers and equipment in the United States—grew 3.2 percent in the fourth quarter of 2013, following growth of 4.1 percent in the third quarter, according to new Bureau of Economic Analysis, or BEA, data.
Slowing residential investment and inventory accumulation and a sharp contraction in federal government expenditures largely drove the decelerated growth rate in the fourth quarter. Nonetheless, today’s data show two consecutive quarters of solid growth for the U.S. economy. Although growth may be resuming its cyclical upswing and corporate profits have rarely been higher, today’s data also indicate that stronger growth at present may be papering over longer-term concerns for the U.S. economy over the dual and intricately related challenges of achieving a competitive economy and inclusive prosperity.
Let’s begin with the role of investment, which not only tends to drive fluctuations in overall growth in the U.S. economy, but also provides the key to increasing productivity, advancing new technologies, and raising standards of living over the long term. But today’s report shows that investment—particularly from the business sector—has been lagging. In the fourth quarter, growth in nonresidential business investment slowed to 3.8 percent from 4.8 percent the preceding quarter and was down from 9.8 percent in the fourth quarter of 2012. Business investment today stands at a mere $16 billion, or less than 1 percent higher than it was in 2007 before the recession.
Slow business investment is the result of a complex mixture of factors, but a lack of means to invest is not one of them. Separate BEA data show that corporate profits increased $40 billion in the third quarter of 2013 and $57 billion in the second quarter after taxes. Nor is investment capital out of reach for most businesses. Federal Reserve surveys show lending standards and terms for businesses of all sizes easing over the past year. Though interest rates have risen slightly in recent months, rates still remain near historic lows and well below the interest rates seen in the 1990s or 2000s economic expansions.
Household consumption, by far the largest component of GDP, grew 3.3 percent last quarter—the fastest seen in three years, according to today’s data. Viewed over a longer horizon, however, average consumption per capita shows only meager gains. Since the start of the Great Recession in December 2007, consumption per capita grew a mere $116 per year. But this average is deceiving. As Federal Reserve economists illustrate, inequality has risen for all groups since the economy returned to growth in 2009. Though consumption is growing on average, some people are obviously consuming a lot more, while most households find themselves facing ongoing financial stress. Uneven consumer demand colors businesses’ diminished expectations for sales growth on a quarter-to-quarter basis—and therefore the need for investment. Compounded over time, inequality also holds back the ability of families to invest in themselves to create the high-skilled workers and entrepreneurs needed to drive economic growth.
The loss of public-sector demand also weighs on business investment as large shares of government services and investments are purchased from the private sector while also providing foundations for markets and innovations on which private investment relies. Today’s data release provides the first look at performance of the overall U.S. economy during and immediately after the politically led government shutdown and threats of debt default last October. The political crisis itself fortunately appears to have been transitory, but today’s GDP report illuminates the longer-term effects this ongoing campaign rendered through actual cuts to public services and investments. Federal government cuts slashed expenditures on public services and investments by 13 percent in the fourth quarter. Even without considering the positive spillover effects to the rest of the economy, economic growth would have been 1 percentage point higher were it not for these cuts.
Although a budget deal reached in January 2014 will eliminate much economic uncertainty over the fate of U.S. fiscal policy, the toll of cuts on the overall U.S. economy are readily apparent in today’s report. In the year since the fiscal cliff and automatic across-the-board spending cuts known as the sequester began to bite, federal government expenditures shrank 5.1 percent after inflation, while the economy slowed to 1.9 percent growth overall in 2013 from 2.8 percent in 2012.
The streak of strengthening economic growth merits a momentary sigh of relief, but it does not alleviate the longer-term challenges facing the U.S. economy. The political divide that has hampered U.S. policymaking in recent years is not poised to disappear. But neither is the economic evidence that focusing on policies to strengthen the middle class and provide ladders of opportunity to join the middle class is the surest way to secure America’s economic future.
Adam S. Hersh is an economist at the Center for American Progress.
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