Bruce Yandle is a distinguished, adjunct professor of economics at the Mercatus Center at George Mason University and the dean emeritus of the Clemson College of Business and Behavioral Sciences.
Several key economic reports will come out this week including the Institute for Supply Management indexes, auto sales, construction spending, and the monthly job numbers. After Friday's announcement of the first estimate for first quarter gross domestic product growth generated some interesting news headlines, it's easy to see why someone might be confused about how the economy is doing.
One of the more pessimistic headlines came from The Wall Street Journal. It compared the fourth quarter's 3 percent growth rate to Friday's 2.2 percent growth estimate for the first quarter and announced: "Slowing Growth Stirs Recovery Fears." However, the San Francisco Chronicle published a more accurate headline: "Consumer Spending Propels 2.2% First Quarter Expansion."
The problem with The Wall Street Journal's headline is that the U.S. economy is not in a recovery mode. The economy is recovering when the current level of real GDP still lies below the peak of the previous expansion, while expansions start when the current level of GDP is higher than that previous peak. In the current case that previous peak occurred during the fourth quarter of 2007. The U.S economy rose above that prerecession level during the third quarter of 2011.
Feel better? We are actually a part of an expanding economy. So what about this 2.2 percent real gross domestic product growth? Well, 2.2 percent is not good. It's pitiful, but it is exactly what was expected. Back in February, the Philadelphia Federal Reserve Bank announced their panel of 45 forecasters' estimate for the first quarter of 2012. Guess what? The number was 2.2 percent—exactly what we got from the Department of Commerce last Friday.
The Federal Reserve Board also predicted similar numbers for 2012. Back in January, they said we would see growth rates ranging from 2.2 percent to 2.7 percent this year. So what else is new?
But there is more. It's not quite enough to make you turn in your sackcloth and ashes to the nearest Goodwill store, but it's still good news. U.S. consumers are out there pitching. Personal consumption expenditures rose 2.9 percent in the first quarter after rising 2.1 percent in the fourth quarter. Retail sales have more than recovered. Auto shipments are accelerating. Payroll employment is up more than a million workers since December 2011, and industrial production growth is healthy. On top of this, the Institute for Supply Management's monthly indexes are signaling growth.
Taking into consideration these data points, economists may have predicted 3 percent growth or better from last Friday's announcement. But there are two key pieces missing, and they are still in intensive care. First off, the housing sector, though no longer losing ground, may be as many as 10 years away from prerecession activity levels. And then there's the combined government sector; it's headed south in overdrive. Government purchases fell 5.6 percent in the year's first quarter, after falling 6.9 percent in the fourth quarter.
Let's face it, the Great American Bread machine is expanding, but at a pretty sorry rate, and not nearly enough to bring the 8.3 percent unemployment rate into 7.0 percent territory. Yet considering the fact that banks are now so far under the thumb of government regulation that they are less entrepreneurial than public utilities, that major Environmental Protection Agency regulations threaten to shut down a large portion of the nation's coal-fired electricity production, and that there are pending tax increases and sequestrations that could befall the economy when the books are closed this year, after all this, 2.2 percent gross domestic product growth seems almost miraculous.
Yes, gross domestic product is expanding, but the unemployed are still trying to recover. This is why so few wish to call the current uncertainty-plagued growth an expansion.