Friday, April 30, 2010

Not Fast Enough

According today's advance estimate from the BEA, US real GDP grew at a 3.2% annual rate in the first quarter.In normal times, that would be a respectable showing - pretty much in line with the historical average. But these are not normal times, and 3.2% growth is not fast enough to make much of a dent in unemployment. According to the rule of thumb known as Okun's Law, roughly 3% output growth is needed just to keep the unemployment rate from rising, because of increases in the labor force and productivity. At this rate, unemployment will be very high for a long time.

The last severe recession - 1981-82 - was followed by a rapid recovery; real GDP grew by 4.5% in 1983 and 7.2% in 1984, and unemployment fell from its postwar peak of 10.8% in Dec. 1982 to 7.3% two years later. This recovery, so far, looks like it may disappoint those of us who were hoping for a similar (or better) showing. It does at least appear to be a little stronger than the "jobless recoveries" in the wake of the relatively mild 1990-91 and 2001 recessions, where the unemployment rate actually continued to rise for some time after the business cycle trough.

Looking inside the numbers shows a couple of good signs: consumption grew at a 3.6% rate and investment in equipment and software increased at 13.4% rate, which suggests some business optimism. Inventory "investment" also added to growth, as, for the first time in a while, businesses actually added to inventories (last quarter it made a positive contribution because firms reduced inventories at a decreasing rate). However, construction continued to be a drag as investment in both structures and housing dropped (how low can they go?). Net exports made a negative contribution as imports grew faster than exports, and Europe's woes may hinder export growth in the future. The most troubling item is a negative contribution from government, because state and local spending was off 3.8%. That's a further reminder that, while the stimulus bill did include substantial money going to states, it wasn't enough. Washington should find a way to do more.

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