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Some Perspective on Real GDP Growth


RealGDPGrowth.png

Today's GDP numbers provide little comfort to Democrats hoping a robust "recovery summer" will aid them in November. GDP grew at an annual rate of 2.4% in the second quarter, down from 3.7% in the first quarter and 5.0% in the 4th quarter of 2009.

The GOP will point to falling growth as proof of Democratic failure, and discouraged Dems who have had a hard time selling even real gains are unlikely to successfully use this latest report to their advantage.

But as always, let's take a moment for some perspective based on the data from the four recessions since 1980.

President Reagan benefitted from very large growth rates in the four quarters following the end of his recession. Like Obama, Reagan inherited a terrible economic situation, and suffered from it throughout his first two years in office. But beginning in the fourth quarter of 1982, GDP growth rebounded very strongly. Over the next four quarters, real GDP grew an average of 5.7%. If we leave out the fourth quarter of 1982, which had a tiny +0.3% growth though technically not part of the recession quarters, then Reagan enjoyed an astonishing average GDP growth of 7.8%, providing the foundation for his "Morning again in America" reelection campaign in 1984.

The two Bush presidencies did not enjoy recoveries of anything like that of Reagan. President G. H. W. Bush suffered from just a 2.6% average growth rate in the four quarters following the 1991 recession, though the rate bumped up to over 4% more than a year after the end of the recession. That sluggish initial recovery set the narrative President Clinton used in the 1992 campaign, even through growth in 1992 was a robust 4% or more.

President George W. Bush likewise faced slow growth following the 2001 recession, with average growth of only 2.3% in the four quarters after the recession. While 9/11 undoubtedly affected the fourth quarter of 2001 (1.4% growth), the next three quarters were 3.5%, 2.1% and 2.0%, followed with a fifth quarter of just +0.1% which is not included in the average. Excluding the post 9/11 quarter and including the later quarter would lower the average growth even more.

Which brings us to President Obama. In the four quarters since the end of the recession (as defined by the end of shrinking GDP in 2009Q2), real GDP has grown an average of 3.2% each quarter. So in fact, the current recovery is a bit stronger than either of the two under Presidents Bush, though well below the extremely strong rate under President Reagan.

Even the current disappointing quarter at 2.4% is better than the average of 2.3% in 2001-2.

So a rational perspective would be that we are recovering better than in the previous two recessions, which were much less dire than the Bush-Obama recession, but well short of the energy that propelled the Reagan recovery.

For November, this rate of growth does not bode well for changing the narrative from recession to recovery, as the White House had no doubt hoped and bet on. The trend of declining growth rates over the past three quarters adds to worry that recovery will be slow or even threaten to dip back into recession. Ironically, of course, a stimulus that might enhance the macro-economy is now politically untenable as even many Democrats have accepted Republican arguments that stimulus spending didn't and doesn't work. Decades of macro-economic evidence to the contrary notwithstanding.

 

Comments
real_american:

Taking money from our grandchildren and giving it to union employees has not and never will stimulate the ecomony. Had the trillion dollars that Obama added to the debt been given to the public to spend, instead of used for political payoffs - it might have stimulated the economy.

The only way to grow our economy is to take money away from the idiots who run our government and stimulate it ourselves.

The only way Obama could make things worse now is to raise taxes - exactly what the moron plans to do. We are doomed until we get these liberals out of power.

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AlanSnipes:

real_american

Apparently, cutting taxes for the rich under Bush did not help the economy or prevent the recession. So why would it be logical (I'm using the word "logic" for a Republican?), to keep those policies which got us into this mess in the first place?

Obama has cut taxes on those making $250,000 a year and wants to keep those in effect.

The wealthiest 1% have increased their income 300% since Reagan. Why does government need to GIVE them money as opposed to the rest of us?
DUH!
Obama did not take money from our grandchildren and give it to unions.
Under Reagan and Bush you supported adding trillions to the debt.
Under Clinton, we balanced the budget and made surpluses. However, since you morons believe the rich are so opressed you had to GIVE them welfare.

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AySz88:

I'm astonished at the sort of mumbo jumbo used to declare that stimulus won't work or has failed, despite all the evidence and literature (and common sense, for that matter) to the contrary.

But I doubt that believing any of that is why Democrats aren't fighting for it; I think all the talk about deficits have spooked them away from increasing the deficit to help a recovery that Republicans won't allow them to take credit for. In fact, if the Republicans take over the house, they might even end up taking credit for anything Democrats do now, just due to the lag time (like how Democrats are suffering from being blamed for how deep the hole was although Republicans are more responsible). It's a no win situation politically, and without that motivation, unfortunately, that's how politics works.

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Chantal:

Terrific chart, Charles! But what in the world was happening during Carter's administration to cause such high GDP growth?

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Matt Sheldon:

When evaluating any recovery, it has to be in the context of the preceding decline.

We has a muted recovery in 2001 because we hardly had a recession at all. We did not even have 2 consecutive quarters of real GDP decline.

Overall real output did not actually fall during that period, so by some definitions it was not even a recession.

Why is this important? Because what matters is the gap between actual GDP and potential GDP.

Potential GDP is the level GDP would be at if the economy were at full employment and industrial capacity utilization is at healthy levels.

When there is larger gap between potential GDP and actual GDP it is much easier for the economy to grow fast. MUCH easier.

Why is that? You have plenty of excess capacity that can be tapped at little or no cost at all. You do not have to build factories. You do not have to re-train workers, you simply hire them from the large excess labor pool.

The recovery in this recession simply cannot be compared to the previous 2 recessions at all. In both of those cases, unemployment did not rise above 8%. In 2001 it barely reached 6%. Quite simply, there was not abundant skilled, productive excess capacity in place to fuel a dramatic expansion.

In 1982, there was quite a lot. Today there is quite a lot.

The comparison vs. 1982 is the only relevant one to make. In both cases there was tremendously productive excess capacity in the manufacturing and construction trades.

The key distinction vs. 1982 is that we have far too many residential and commercial structures in this country than we need at the moment. Although that excess capacity is quite productive, there is not an available productive use for it.

In manufacturing the story is quite the same, except we do not have too many cars and appliances per se, but we do have too few buyers.

This economy cannot recover until that productive capacity is either sustainably deployed (as in without large government subsidies) or it is dismantled and re-trained for other purposes.

Low-skilled construction workers simply need to go get better skills that are in higher demand.

For example, given that we are keeping our cars for longer there is likely to be an increased demand for auto mechanics.

Given that we are staying is our houses for longer (due to negative equity) many of those same construction workers need to be re-trained to do remodeling and renovation work, which requires more engineering and design skills.

Likewise, Americans have to fix their personal balance sheets. This transition will take years to work through. Don't expect 6% unemployment for another 3-4 years.

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