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Economic Growth Slows In First Quarter. What If This Is As Good As It Gets?

There was some unwelcome news in this morning’s release of the first quarter GDP figures by the Commerce Department:

The American economy slowed to a crawl in the first quarter, but economists are hopeful that the setback will be temporary.

Total output grew at an annual pace of 1.8 percent from January through March, the Commerce Department said Thursday, after having expanded at an annual rate of 3.1 percent in the fourth quarter of 2010.

When the year first began, economists had been expecting a much more robust growth rate of about 4 percent, only to be barraged by bad report after bad report as the days wore on. Turmoil in the Middle East set off a jump in oil prices. Winter blizzards shuttered businesses and delayed construction, causing investments in nonresidential structures like office buildings to fall by 21.7 percent compared with an increase of 7.6 percent at the end of 2010. Imports, which are subtracted from output, surged, and military spending sank.

Still, economists expect many of these problems to fade later in the year. Last quarter’s dismal news was, hopefully, “a pause, not a trend,” said Kathy Bostjancic, director for macroeconomic analysis at the Conference Board.

Of these various economic menaces, the most enduring is probably higher commodity prices, which reduce the amount of pocket money that households and businesses have available to spend on other purchases and, in the case of companies, hires. Gasoline prices have shown little sign of falling in recent weeks, and have nearly neutralized the 2011 payroll tax cuts that were intended as a stimulus.

“Consumers are spending more, but it’s getting soaked up in higher gas prices and higher food prices,” the chief economist at RDQ Economics, John Ryding, said. “That’s not leaving nearly as much left over for discretionary spending.”

Declines in government spending will continue to drag on the economy throughout the year, as strapped state and local governments cut back and the federal government tries to cut down on nonmilitary spending. Last quarter’s steep drop in military spending, which tends to be volatile, will probably reverse itself later in the year, economists said.

Ezra Klein looks at the numbers and points out something that’s rather obvious:

What we need right now is something different from, and faster than, normal growth. What we need right now is catch-up growth. We’ve spent years underperforming economically. We’re 7 million jobs below where we were when the recession began. Like a man who has been starved for a year, getting back to normal won’t cut it. We

(…)

Here’s the bottom line: “Recovery” means a “restoration to a former or better condition.” Our economy isn’t anywhere near its former condition, and 1.8 percent GDP growth isn’t enough to get us there.

Obviously, but the question is how do we get there or, more importantly, will we ever get there?

Last October, Dave Schuler wrote a piece over at his own site suggesting that we may be entering an era where economic growth will be more like Europe than what we’ve become used to in the post World War II era:

[T]he experience in growth over the last twenty years shows a markedly slower rate than prevailed over the previous twenty years or the previous forty years.

Second, the period since 1990 has included two bubbles: the dot-com bubble and the real estate bubble. Those bubbles are clearly evident in the peaks over the last twenty years.

(…)

What forces could lead to growth at the 4% or higher level? Besides the unexpected which is just that, unexpected, I can only think of two. If you believe that we’re going to experience growth at a level higher than that of other developed countries you must either believe that we’re going to continue to experience a high level of immigration and/or that we’re going to continue to experience bubbles

Encouraging immigration to help sustain economic growth would be a  rational policy choice, and our immigration system is broken and long past the point where it needs to be reformed However, two factors suggest that this is unlikely to happen. First, we have clearly entered one of those times in American politics where anti-immigrant sentiment is on the rise. It’s far more likely that immigration laws are going to to become more restrictive in the future rather than less restrictive, especially since immigrants are an easy target for politicians and demagogues to point to as the reason why there aren’t enough jobs. Second, a slow economy in the US tends to reduce immigration since the economic incentives for coming here are less apparent than they are during a boom period. So, don’t necessarily count on the immigrants to save us.

So does that mean we should be trying to create another economic bubble? Well,  we have learned quite well over the past three years or so what the consequences of an economic bubble actually are. Those few years of spectacular growth and big profits are tempting but they don’t last long.  In the end, the artificial diversion of resources that an economic bubble creates will end up being corrected when the bubble collapses and takes the economy down with it. Creating economic bubbles isn’t all that hard, of course. All it takes is an incredibly loose monetary policy at the Federal Reserve. What happens thereafter, though, makes whatever benefits the bubble provides not worth the cost.

Moreover, the old tools for stimulating the economy don’t seem to work anymore. If nothing else, the obvious failure of President Obama’s stimulus package to turn around the economy or halt the collapse of the jobs market would seem to be proof that the old Keynesian tools don’t work anymore. With a Federal Budget that is increasingly diverted to paying interest on the National Debt and funding entitlement programs, neither one of which contribute all that much to economic growth, it’s simply not possible to throw money at the problem anymore (which, I presume, would be Klein’s favored solution). Of course, budget deficits also mean that tax cuts, the traditional Republican answer to slow economic growth, isn’t really an option at the moment either. In fact, taxes will clearly have to be increased for some people, and that’s likely to further depress economic growth.

Meanwhile, the factors that are holding the economy back, such as rising energy and commodity prices, don’t seem to be going away anytime soon.

So, we may be headed for an era where our economic growth is more similar to Europe than we’d like. That means unemployment is likely to be high for some time to come, that American optimism will become a thing of the past, and that our political system is likely to become even more polarized than it already is.

 

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About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May, 2010 and also writes at Below The Beltway. Follow Doug on Twitter | Facebook

Comments

  1. jwest says:

    Here’s the argument in rap form:

    http://www.youtube.com/watch?v=GTQnarzmTOc&feature=player_embedded

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  2. Axel Edgren says:

    Meanwhile taxes are at their lowest for a long time, the effective corporate tax code is very low with all the loopholes, the supreme court allows corporations to fund and donate covertly and pretty much ignore the risk of class action lawsuits, the stock exchange is showing profits for many big capital owners in general, Obama hasn’t increased the amount of public employees (they have remained as they are – it’s private employment that has gone down) and there is less spending overall on infrastructure etc. than ever.

    So the country is actually very neo-liberal right now, yet the recovery is anemic. But you know what? If we sodomize the middle class and those public employee untermensch a little more while fellating our Galtian overlords a little more thoroughly, then we’ll get our growth! Just look at good ol’ UK and Ireland – they ignored the poor and unemployed in order to make the ghost of Reagan happy and cut the deficit as much as possible no matter what the cuts, and their economies are recovering with all haste!

    In all seriousness – if you don’t put more democrats in congress in 2012, you will be hurting your country more than bin Laden could ever dream of doing. I am serious: do as I say or your decline will be swifter and more painful.

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  3. Drew says:

    Did someone say something about economic performance under Reagan??

    http://libertyworks.com/1st-quarter-gdp-an-epitaph-on-obamanomics/

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  4. jwest says:

    Axel,

    I don’t know if you intended it or not, but you almost made it sound like being a Galtian Overlord sodomizing and being fellated by the middle class was a bad thing.

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  5. Axel Edgren says:

    Did someone say something about economic performance under Reagan??

    You mean the Reagan that raised taxes and boosted the deficit at an unprecedented rate? Or do you mean “republican Reagan”?

    Like or Dislike: Thumb up 0 Thumb down 0

  6. legion says:

    jwest,
    Oh, being a Galltian overlord is a wonderful thing. It’s the people whose backs their fortunes are built on who don’t have it so good… But then, as rich conservatives are fond of telling poor people – not everyone can be a “winner”…

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  7. john personna says:

    My sense is that we had a weak (and fairly jobless) recovery going … and that gas prices might be enough to stall it.

    There are plenty of old-time cartoons to provide the visuals. Think esp. Wile E. Coyote.

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  8. jwest says:

    Legion,

    “It’s the people whose backs their fortunes are built on who don’t have it so good…”

    So now we’re going to start complaining about Galtian Overlords oppressing poor people? Is there no end to the whining?

    Like or Dislike: Thumb up 0 Thumb down 0

  9. Drew says:

    jp –

    You may find this interesting.

    http://www.econbrowser.com/archives/2011/04/economy_still_g.html

    axel – look at the GDP history. You won’t.

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  10. An Interested Party says:

    Is there no end to the whining?

    Good question…are you still harping on about the president’s personal information…

    Like or Dislike: Thumb up 0 Thumb down 0

  11. mpw280 says:

    What personal information, do you know any? Grades, Test Scores, Job History, you know all the shit the dems had to have on Bush so they could say he is an idiot, but that which a dem keeps hidden so it is ok. You can’t say Obama is an idiot because we don’t know if he took all his course pass/fail or what. So you can say it is stupid to ask but the dems press attack dogs demand all that information when talking about a repb pres candidate. So when dems and their press corps start asking any repb pres candidate about school grades and job performance will you tell them to stfu as any information of that sort isn’t important or necessary to the job of president? Or will you flip your card around to the other side and say it is only fair to know that info so we can make an informed decision about the office of president, I know how I am betting on that one. mpw

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  12. An Interested Party says:

    My my, mpw280, you really need to calm down…maybe rest for a few days away from the Internet or something…

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  13. john personna says:

    I didn’t see anything surprising in that Drew. I look at it in context of this old Hamiltion piece on oil shocks:

    http://www.econbrowser.com/archives/2009/04/oil_shocks_and_1.html

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  14. john personna says:

    Btw, I meant Wile E. Coyote in the “thunk!” sense, of rapid stop, rather than the more traditional “running in air” visual. It isn’t that bad.

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  15. Drew says:

    “I didn’t see anything surprising in that Drew.”

    Me neither, including you breezing past business investment and an energy policy that might actually deal with foreign energy dependence, as opposed to attempting to force ideologically driven alternative sources that might have relevance 20 – 30 years from now.

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  16. Ben Wolf says:

    Anemic economic performance is the new norm because there is no basIs for a strong recovery. Energy prices will continue to rise, we don’t make much that anyone wants to buy, and most of our innovative energies are devoted to high-risk financial speculation. We chose the path of hollowing out our productve capabilities decades ago in exchange for short-term profit gains.

    There’s nothing left to generate useful economic activity.

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  17. john personna says:

    Me neither, including you breezing past business investment and an energy policy that might actually deal with foreign energy dependence, as opposed to attempting to force ideologically driven alternative sources that might have relevance 20 – 30 years from now.

    ???

    Is there an energy policy which is both palatable to the Right and Reality Based?

    I know the “drill” mantra, and I know US reserves.

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  18. hey norm says:

    January had record snowstorms. Gas prices spiked. Stimulus spending slowed. And yet we grew at 1.8%.
    Last quarter was 3 something %. We had 8 years of Bush at an average of 2.2% – but if you take home equity extraction out of that it’s much closer to 1%.
    Under Obama the private sector has added jobs, and the public sector cut jobs. This is exactly what the so-called conservatives say they want – and yet they continue to grouse. I guess they are upset because Obama hasn’t invoked the magic unicorn theory of magiconomics they believe in.
    Yes we need to grow at a more rapid rate to overcome the republican debacle of the last eight years. But it’s not going to be a straight line. Almost all indicators are trending in the right direction.

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  19. Patrick T. McGuire says:

    Obviously, but the question is how do we get there or, more importantly, will we ever get there?

    We won’t get there as long as the liberal Marxists are in the driver’s seat.

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  20. john personna says:

    Liberal Marxists? Which are those? The ones who throw good parties?

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  21. hey norm says:

    mcguire…
    the “liberal marxists” were handed a tanking economy that had been growing at an anemic 1% for eight years, a job market that was shedding jobs at the rate of 600,000 a year, and an exploding debt due to unpaid for tax cuts, 2 unpaid for wars (one of choice), and an unpaid for entitlement expansion. 3 years later the bleeding has been stopped, and steady re-growth has begun. so i’m confused…where exactly do you want to get? back to the economy that the so-called republicans mangled?

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  22. hey norm says:

    sorry – that should be 600,000 jobs a month, not a year. 600,000 jobs lost a year would be a vast improvement over what the so-called republicans left in their wake.

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  23. anjin-san says:

    Hey Drew is back! Drew you never got around to telling us the names of the other Presidents who released their birth certificates – it should be easy, since according to you it is SOP…

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  24. [...] back into to the economy and that the recovery continues. That last part is true, but as we saw last week, that recovery appears to be very weak at the moment. Gas and oil prices have clearly had an impact [...]

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