Better faster than slower
IT ISN’T difficult to be the least dirty shirt in the hamper these days. America’s economy seems to relish the role, continuing to post growth performances that would be utterly disappointing were they not so much better than those managed by other rich countries. Real output rose at a 2% annual pace in the third quarter, reported the Bureau of Economic Analysis this morning. That’s miles better than Europe, which remains stuck in recession. It also marks an acceleration from a second quarter in which growth clocked in at just 1.3%. Yet it’s still far too little given the gap between actual output and what the economy should be capable of producing—nearly $900 billion, a 6% shortfall.
Unquestionably, there is good news in the report. The acceleration itself is encouraging. So too are some of the sources of that acceleration. Consumers continue to pull their weight, and an 8.5% rate of growth of durable goods consumption in the third quarter suggests that the appetite for big purchases is holding up. Residential investment boomed, rising at a 14.4% annual pace for the quarter. Despite that the sector managed just a 0.33 percentage-point contribution to total growth. The relatively low contribution reflects just how far residential output tumbled during the recession and recovery. Construction should chip in ever more in coming quarters, however, as inventory levels have been plummeting and rents and prices rising.
Government spending and investment also helped output along in the third quarter. The biggest contribution came from a rise in federal defence outlays. But perhaps more important for the future, state and local government output was essentially unchanged—the best performance for that figure in three years. If state and local government cuts do indeed become a small positive contributor to growth rather than the significant drag they have been, that will make a faster recovery a bit easier to attain.
There is also some cause for concern in the report, however, which seems to reflect the slowdown in industrial activity related to global economic weakness. The contribution of investment to growth sank for a second consecutive quarter, and net trade was a drag on output as exports fell by more than imports. Where industrial recovery and trade helped compensate for domestic economic weakness early in the recovery, they now seem to be preventing domestic resilience from adding more to output.
There is good reason to expect continued acceleration into the fourth quarter. A recovering housing sector should continue to raise household confidence. The Fed will see nothing in the report’s inflation figures to discourage them from continued easing, via asset purchases; the price index for personal consumption expenditures rose just 1.5% in the year to the third quarter. But beyond that, the outlook grows more cloudy. The global economy remains shaky, and the euro area’s recession shows little sign of abating. Perhaps more important, a raft of spending cuts and tax rises—the fiscal cliff—looms at year’s end. If Congress is unable to prevent some of the expiring measures from hitting, the fiscal blow could harm two of the sectors most responsible for this quarter’s decent performance: personal consumption and government spending and investment. That is the last thing the American economy needs with output well below potential, growth perhaps a bit below trend, and unemployment high.
And that, in turn, may make the outcome of the November election all the more important. Neither candidate received a club with which to bludgeon the other in the middling growth figure, though continued growth does favour the incumbent. But both will impress upon voters that things should be better. They should, but most certainly will not be if Washington can’t resolve its fiscal differences.