The 2000s: A Slow Start to the 21st Century
Second-quarter GDP growth was revised up from 1.6 percent to 1.7 percent in the third and final estimate—at least until the July benchmark revisions next year. The overall picture remained virtually unchanged, with upward revisions to private consumption expenditures and inventories countered by a higher import flow than previously recorded. The upward revision pales in comparison to the initial revision that took GDP growth down from the 2.4 percent rate initially reported in July to 1.6 percent last month.
Personal consumption growth slowed during the second quarter, contributing 0.6 percentage point less to output growth. Nonresidential fixed investment picked up during the quarter, but that growth continues to be concentrated in equipment and software while investment in structures continues to decline. Residential investment turned sharply as the temporary homebuyers’ tax credit pulled in home sales from the future; contributions from housing will likely turn negative again in the second half of the year. Foreign trade was the biggest drag on growth in the second quarter, as imports jumped 33.5 percent and export growth continued to slow. In all, foreign trade subtracted 3.5 percentage points from second-quarter GDP growth.
The decline in GDP from the first quarter to the second quarter, a two percentage point drop from 3.7 percent to 1.7 percent, is particularly worrisome for many observers, as it may be signaling a loss of momentum in the recovery. Adding to the pessimism is an array of rather weak third-quarter indicators that point to further slowing. Private forecasts have been marked down accordingly, with the Blue Chip consensus forecast of GDP growth falling in each of the past three months. Third-quarter growth is now expected to come in just below 2 percent, as even the most optimistic forecasts (the ten highest) average to just a bit above 2½ percent. The consensus also calls for subtrend growth in the fourth quarter and for the first half of 2011.
|Blue Chip Economic Indicators newsletter month|
Source: Mortgage Bankers Association.
These expectations make for a fitting end to the growth disaster that was the decade of the 2000s. If growth over the next two quarters were to average 2 percent—close to that expected by private forecasters—real GDP growth will have averaged a mere 1.6 percent in the past 10 years. It will mark the first decade in the post-WWII period in which average annual growth will have fallen short of 3 percent. Even in the 1930s, a decade notorious for the Great Depression, GDP growth fared better, much better, averaging an annual rate of 2.7 percent.
|Decade||Real GDP growth, compound annualized rate|
a. Assumes 2 percent annual growth for the second half of 2010.
Source: Bureau of Economic Analysis, authors’ calculations.
Where does that leave us? The following chart puts the dismal decade in a different perspective. Over the second half of the twentieth century, real GDP growth averaged 3.4 percent per year. The dashed line in the figure shows the level of real GDP that would have been attained had the economy grown at that historical trend rate for all of the present decade. By that metric, actual GDP currently falls 18.5 percent short of trend GDP—almost one-fourth the present size of the U.S. economy!
The Great Recession is a big part of the story here, but far from all of it. The economy missed the starting gun, beginning the decade with a mild recession in 2001 that left it 3 percent below trend by the end of 2001. Not so bad, but what followed is truly troubling. During the subsequent recovery, growth largely remained at subtrend levels, so that rather than closing the gap, the economy continued to lose ground. By the onset of the recession in the fourth quarter of 2007, the gap had swelled to 7.5 percent. The Great Recession, of course, subsequently delivers the knock-out blow.
One has to wonder whether the first tremors of the Great Recession were being felt much earlier than widely acknowledged.