The end of the year produced a number of media celebrations for the United States’ economic comeback. News stories endlessly touted the 5.0 percent GDP growth figure for the third quarter, contrasting it with weak growth in Europe, slowing growth in China and a recession in Japan. Reporters also touted the 321,000 jobs gained in November — the strongest such growth in almost three years. In addition, the month’s 0.4 percent rise in the average hourly wage was taken as evidence that workers were now sharing in the benefits of growth.
The economic news was so positive, in fact, that the Republicans switched from blaming Obama for his allegedly job-killing taxes and regulations to taking credit for the economy’s performance. Leading Republican anti-tax crusader Grover Norquist credited the budget cuts demanded by Republicans in 2011 for the economy’s strength.
As usual, just about everything we’ve heard about the economy is wrong. To start, the 5.0 percent growth number must be understood against a darker backdrop: The economy actually shrank at a 2.1 percent annual rate in the first quarter. If we take the first three quarters of the year together, the average growth rate was a more modest 2.5 percent.
The economy is very slowly making up the gap between potential GDP and actual GDP — that is, the value of the goods and services the economy could be producing but isn’t because of a lack of demand. The Congressional Budget Office puts the size of this gap at 3.6 percent of GDP, which comes to more than $600 billion annually, or more than $4,000 per household. This is a lot of money to be throwing in the garbage every year. At the economy’s growth rate through the first three quarters of 2014, we will close this gap in 12 to 36 years.
Compare the 2014 growth number with those from recoveries after previous severe recessions: Growth averaged 5.2 percent from 1976 to 1978, and it averaged 5.4 percent from 1983 to 1985. That so many people are celebrating 2.5 percent growth over three quarters shows a serious lessening of expectations.
Furthermore, the third-quarter GDP number was driven by factors that will almost certainly be reversed in the fourth quarter. A big jump in military spending added 0.7 percentage points to the quarter’s growth. This will almost certainly be reversed in the fourth quarter, which will create a drag on growth.
Similarly a reported fall in the trade deficit added 0.8 percentage points to the quarter’s growth. The trade data for the fourth quarter thus far indicate that the deficit will almost certainly widen, thereby subtracting from growth. In short, anyone who expects that we will see more quarters with 5.0 percent growth is not paying attention to the data.
Even the comparisons with other countries are misleading. While austerity policies have led to weakness across Europe, countries such as Germany, Austria and even France have better labor market performances when measured by employment rates. Japan has made more than twice as much progress in getting its population back to work since it adopted stimulus policies in 2013. And even with its slowdown, China is still growing at more than a 7.0 percent annual rate.
Of course, these statistics don’t matter to ordinary people as much as the extent to which they are seeing the benefits of growth in the form of higher wages. Here also the reporting has been badly confused.
The 0.4 percent growth figure reported for November was an anomaly. Wages reportedly grew at just a 0.1 percent annual rate in October and were flat in September. The November jump was making up for the weak growth reported the prior two months. Wages grew at a just a 1.8 percent annual rate over the last three months compared with the prior three months. That is slightly slower than the average over the prior 12 months.
Real, sustained wage growth requires much more tightening of the labor market. Even if the economy sustains a pace of 300,000 new jobs a month (it won’t), the labor market still will not make up the ground lost in the recession by the end of 2015. Most American workers are still far from feeling confident that they can ask for a pay raise or find another job that would pay them more.
These circumstances should be front and center as the Federal Reserve Board sets economic policy in 2015. There will be growing pressure on the Fed to raise interest rates as the financial industry starts warning about incipient inflation. Everyone should realize the purpose of higher interest rates is to slow the economy and keep people from getting jobs. That is not a policy that is in most people’s interests.