U.S. Economic Growth: Reflections

June 25, 2010

Revised U.S. GDP expanded 2.7% at an annualized rate (saar) last quarter and by a similar 2.4% between 1Q09 and 1Q10.  Although not as good as preliminary indications, growth in the United States has not been bad for an advanced economy.  GDP last quarter increased only 0.8% saar in Euroland and by 1.2% in Britain.  True, Japan did even better than the United States in the first quarter.  However, the Japanese data are erratic and unreliable, and a better trend indication is reflected in the 1.1% rate of rise in the twenty years between the first quarters of 1990 and 2010.

It’s not that the United States economy is performing well as the fact that the others have performed poorly.  In the four years between the first quarters of 2006 and 2010, U.S. real GDP growth averaged only 0.6% per annum (p.a.), with residential and non-residential investment falling at rates of 17.8% p.a. and 2.4% p.a. and consumption climbing just 1.0% per annum.  Net foreign demand was a source of strength, as export growth of 3.4% p.a. while imports contracted at a 1.8% pace.  The impression of runaway public spending is not corroborated by a meek 1.7% annualized four-year expansion pace in that item.

Ever wonder how a U.S. jobless rate of 4.7% at the end of the first quarter of 2006 gets transformed into 10.1% last October and 9.7% currently?  The 0.6% rate of real GDP growth in that period was less than a fifth as strong as the long-term 3.3% per annum trend recorded during the previous fifty years.  In addition, American productivity continues to climb rapidly, averaging 3.2% per annum between 1Q06 and 1Q10.  Economists claim that strong productivity growth offers the key to long-term non-inflationary economic growth.   Remember that productivity is nothing more than how many man-hours it takes to produce a given amount of product, so faster productivity implies a smaller need for labor at least in the short run.  The problem is that four years doesn’t constitute a layman’s notion of a short period of time.  In fact, it’s a whole presidential election cycle.  Buried in the pile of uncertainty and newness of the present economic environment is the striking paradox of a severe recession in a golden era of brisk productivity growth.

According to a monthly survey of many forecasters by The Economist, the United States in 2010-11 is projected to expand 3.1% per annum, maintaining a decisive advantage over other advanced economies like Euroland (1.2% p.a.), Japan (2.2% p.a.), and Britain (1.7% p.a.).  The bolded operative word is “advanced.”  America’s relative strength in the set of developed countries is in fact dwarfed by how sharply it lags behind the growth of China and other emerging nations.  Chinese real GDP grew 10.4% per annum between the first quarter of 2006 and the first quarter of 2010.  That pace was seventeen times greater than the growth of U.S. real GDP.  Even more impressively, China has sustained growth of 10.3% per annum over the last 27 years!  While the extremes on the U.S. political spectrum argue about the merits of the U.S. and European brands of capitalism, China’s authoritarian brand of capitalism but no democracy and scant individual freedom is running laps around the other two models.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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