The Department of Commerce made news Wednesday by announcing the first quarterly decline in gross domestic product (GDP) since the recession ended in 2009. As always, GDP is only a summary measure, not the whole story. This GDP report continues the narrative of the past three years: We are making history with the slowest post-recession recovery in the modern era.
Measured GDP was essentially constant in the fourth quarter (October–December) of 2012, declining by the barest of margins, 0.1 percent. Next month’s revision might make that number slightly positive, but more incisive lessons can be learned by looking at this GDP report in the broader context.
First, zero growth is less than nothing. The U.S. population grows at a little less than 1 percent per year. Thus, just to maintain the same living standard, output needs to expand at 1 percent per year. Over the entire year of 2012, GDP grew by just 1.5 percent, with the private sector expanding to replace some government spending. That rate of GDP growth is much lower than the historical rate of GDP growth and narrowly affords Americans to increase their standards of living.
Second, many components of GDP often move in different directions, reflecting the complexity of the economy. For instance, while private investment in homes and equipment rose rapidly, private inventories fell enough to undo those gains.
Consumers purchased more durable goods in the fourth quarter, but businesses seem to expect that increase to reflect consumers’ choice of timing rather than a trend toward higher spending; hence the fall in inventories.
Third, government spending is “baked in” whole, so changes in government spending show up prominently. In the fourth quarter, defense spending dropped drastically, falling at a 22.2 percent annualized rate. But defense spending had grown at a 12.9 percent rate in the third quarter, suggesting that at least half the decline is an artifact of the timing of defense purchases. Elsewhere in government, there was a slight increase in federal non-defense spending and a slight decrease in state and local government spending.
Although GDP fell last quarter, the appropriate response is disappointment, not panic. In a typical economic recovery, the economy would be rising quickly, catching up with its long-term trend. Instead, the economy continues to muddle along below trend.
During and after the recession, President Obama and Congress enacted a variety of new policies—a large “stimulus” package, financial regulation, massive government intervention into the health care industry, inconsistent tax policies, and a sustained distortion of the energy sector. How long will the economy stay below trend before the Administration concludes that pro-private-sector policies might work better?