U.S. growth accelerates despite spending cuts

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The U.S. economy has grown significantly faster than previously thought during President Obama’s years in office, clocking in at a healthy 2.4 percent pace on average between 2009 and 2012, under sweeping revisions of the gross domestic product report published Wednesday by the Commerce Department.

The increase in growth from the tepid 2.1 percent previously reported by the department came along with news that the economy grew at a surprisingly solid 1.7 percent rate last quarter despite $85 billion of federal spending cuts and sharp tax increases at the beginning of the year.

The department’s revisions, which for the first time treat business and federal spending on research and development as an investment that contributes to economic growth rather than a business expense that subtracts from the economy’s momentum, had a particularly marked impact last year. Growth during 2012 was up 2.8 percent rather than the 2.2 percent previously reported.

The government and everyone else “has been understating the strength of the recovery” for years, said Justin Wolfers, economics professor at the University of Michigan. “The economy was motoring along” while everyone was fearing that growth would come to a near-halt in the face of fiscal austerity.

“One must not forget that the U.S. economy has been experiencing a dramatic fiscal tightening in recent months. Against this backdrop it is actually quite remarkable how resilient above all the household sector has been throughout this period,” said Harm Bandholz, economist at Unicredit Research.

To be sure, spending cuts at all levels of government have been a significant drag on growth, cutting into the economy’s performance for 10 out of the last 12 quarters, Mr. Wolfers said.

But that drag was more than offset by gathering momentum in the private sector, where businesses have created an average of 200,000 jobs a month this year, he said. The Labor Department’s monthly jobs reports, which have shown a steep drop in unemployment from over 10 percent to 7.6 percent during the recovery, have more accurately portrayed the economy’s underlying strength, he said.

A survey released Wednesday by ADP, a private payroll processing firm, found that businesses created another 200,000 jobs in July after creating nearly that many in June. The government’s next monthly unemployment report, due out on Friday, also is expected to show job gains in the 200,000 range, continuing the trend of solid growth this year.

The broad revisions published by the Commerce Department on Wednesday bring its estimates of growth closer to the pace of growth underlying the jobs report, economists said. Besides finding that growth since the recession has been significantly higher, it found the slump during the recession was shallower, with output dropping at a 2.9 percent annual rate rather than 3.2 percent reported earlier.

In the second quarter of this year, the department’s 1.7 percent growth estimate was far more robust than economists predicted. Most forecasters expected growth in the 1 percent range, with some predicting growth would drop as low as 0.2 percent as a result of the federal austerity measures.

But while the second quarter showed an unexpected acceleration of growth, the department slashed its estimate for first quarter growth to 1.1 percent from 1.8 percent, partly as the result of $200 billion of federal tax increases that started taking effect on Jan. 1.

Federal spending cuts that started taking effect in March did play a role in holding down growth during both quarters. In the second quarter, government spending fell by 1.5 percent after plummeting by 8.4 percent in the first quarter, led by deep cuts in defense spending as the Pentagon geared up to carry out its half of the $85 billion cuts ordered by Congress.

Still, the economy managed to pick up speed in the second quarter despite the federal cuts, as other major engines of growth such as the reviving housing market shifted into a higher gear.

While consumer spending sagged some under the weight of the tax increases and spending cuts, exports surged at a 5.4 percent rate, business investment spending rebounded by 4.6 percent and housing construction soared by 13.4 percent.

The economy’s better-than-expected performance surprised and pleased global markets. The Dow Jones industrial average rose by more than 50 points at the open of trading on the New York Stock Exchange following the release of the growth report, but lost those gains and declined later in the day after the Federal Reserve announced no change in its easing plans. The Dow ended down 21 points at 15,500.

The Fed, in a statement released after a two-day meeting of its rate-setting committee, did not take note of the stronger growth seen in the past four years but rather found evidence that “fiscal policy is restraining growth.” It said growth remains “modest” enough to merit a continuation of the central bank’s easing programs for a while longer.

While the Fed and most forecasters expect the growth rate to pick up closer to 3 percent in coming months, some fear that the gridlock between the Republican-led House and the Obama White House will continue this fall and lead to another round of across-the-board spending cuts, causing a deceleration in growth as seen in the first half of the year.

“The two issues that bear watching are government spending and international trade,” said Douglas Handler, chief U.S. economist at IHS Global Insight. “Federal government spending subtracted 0.1 percentage point from the second quarter [growth rate], after subtracting 0.7 percentage point in the first, mostly due to the government spending sequester. The open question remains: Has most of the sequester’s damage been done already, or will government agencies realize by the end of the fiscal year that additional cuts will be required to attain their budget requirements?”

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