Comment on U.S. GDP Growth and Trade Protectionism

June 29, 2016

The second and final revision of U.S. growth between the final quarter of 2015 and the first one of 2016, released yesterday, was revised upward by 0.3 percentage points to 1.1% at a seasonally adjusted annualized rate (saar).  The initial growth estimate reported in late April had been 0.5% saar.   Commentary surrounding the report was upbeat.  The direction of revisions can be a good omen in and of itself, and moreover, other data suggest faster growth of about 2.5% in the spring quarter, which ends tomorrow.

Cast in a longer span of time, recent growth appears quite depressed.  Only once in the last six calendar quarters and five times in the past sixteen quarters did economic growth exceed 2.1% saar, and growth over the latest reported year and a half averaged a mere 1.8% saar.  1.8% also happens to be the average U.S. growth rate since the final quarter of 1999.  By comparison, U.S. real GDP expanded twice as rapidly, that is by 3.7% saar, over the prior half century between 4Q49 and 4Q99.  In the most recent quarters, whose midpoint coincides nearly exactly with the Fed’s one and only interest rate hike of this cycle, real GDP growth averaged just 1.2% saar, the weakest two-quarter pace in three years.

Nominal GDP also slowed in the latest two quarters.  That pace of 1.9% was the second slowest over consecutive quarters since late 2009 as the economy was just emerging from the Great Recession.  Nominal GDP growth, by comparison, averaged 7.5% saar in the second half of the twentieth century.

From this downshift in growth gears, two inferences need noting.  First, there was a juxtaposition between the Fed finding an opportunity to begin policy normalization in the federal funds rate and a lull in U.S. activity.  Officials didn’t plan for that to happen and indeed felt that policy remained so accommodative after the December hike as to exert no drag.  The Fed’s experience has been shared by a number of monetary authorities since the Great Recession that have tried to lift interest rates from zero or near-zero policies.  It’s not clear whether there is a cause and effect process going on, perhaps through indirect announcement channels.  But the experiences so far leave a concern which is whether economies used to ultra-low or negative interest rates can in fact tolerate a return to normal.  If anyone can, it would seemingly be the United States, but that possibility remains to be proven.

The second point to be made involves the halving of growth between the second half of the last century and activity since Y2K.  Rapidly expanding international trade provided the lubricant for the post-WW2 economic miracle, and a series of negotiated multilateral trade pacts was essential to that process.  Even before the Great Recession, Europe’s debt crisis, Brexit and the Donald Trump offensive against trade, however, trade negotiations had stalled in many ways.  The problems of job displacement connected with globalization, widening income inequality, ageing populations, and rapid technological innovation must be addressed if democratic forms of government are to retain legitimacy and voter respect.  However, the answer ought to lie in devising ways to address the problems without shutting down trade.  In the long run, trade tends to expand faster than other components of aggregate demand. Take trade out of the equation, and economic activity will in time slow still more.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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