There’s no margin for error in today’s 2% economy
The post-mortems on Friday’s revision to first-quarter gross domestic product featured all of the well-anticipated factors depressing economic growth. The U.S. economy contracted at an annualized 0.7 percent pace, the result of harsh winter weather; a strong dollar, which slashed exports by 7.6%; and a West Coast port strike, which caused delays in the flow of goods into and out of the country.
Some economists pointed to a fourth factor: “residual seasonality” in the first-quarter GDP data that isn’t adequately accounted for by the existing seasonal adjustment factors.
Identifying why the economy contracted last quarter in no way alters the underlying message. There is no margin for error in today’s economy. If record snowfall in parts of the Northeast is enough to send the economy skidding, the economy’s momentum is inadequate.
The U.S. has handled an even stronger dollar for long periods of time without going negative. In the early 1980s, a soaring dollar inspired a group effort by five industrialized nations — the 1985 Plaza Accord — to weaken its foreign exchange value. The U.S. current account deficit was rising rapidly. Yet real GDP growth averaged 7.8% in 1983, 5.7% in 1984 and 4.3% in 1985.
How has the U.S. economy weathered some of the biggest winter storms in history? Neither the Storm of the Century in March 1993 (estimated damages: $10 billion), nor the paralyzing Blizzard of 1996 produced a quarterly contraction in real GDP.
Wait, you say. The U.S. economy was emerging from back-to-back recessions in the early 1980s. Of course growth was rapid. And comparing the economic response to various snowstorms isn’t exactly a scientific control study.
You are correct. The phase of the business cycle is much more important than the weather. Which is another way of saying that monetary and fiscal policy are more important influences on economic growth.
The point is that neither rain nor snow nor the currency’s value should be enough to push the economy over the edge.
Two percent growth — an average of 2.2%, to be exact, since the end of the recession in June 2009 — is inadequate. Economists can point to the low level of jobless claims and solid employment growth as signs of measurement flaws in GDP, but there are as many cautionary signs as reasons to be hopeful. New business formation and capital investment, which is taking a hit from oil-related investment, have been disappointing throughout the expansion.
Also read: The economy actually is not in a recession
More troublesome than actual growth are estimates of potential growth at a time when more and more Americans will be drawing on Social Security and Medicare instead of contributing to those entitlement programs.
The Federal Reserve has been ratcheting down its estimates for how fast the economy can grow without straining its resources and generating inflationary pressure. At the March meeting, policy makers projected long-run growth at 1.8% to 2.5%. Two years ago, in June 2013, the estimate was 2%-3%, down from 2.4%-3% in June 2011.
What are the implications for policy? Michael Feroli, chief U.S. economist at J.P. Morgan, says reduced economic potential suggests a shift from demand-side stimulus to supply-side stimulus. For example, finding ways to encourage labor-force growth, including the acquisition of new skills needed for today’s economy, and new business formation.
That would be a welcome change of focus. At this point, the excuses for an economy that keeps stumbling are wearing pretty thin.