Economics, Pethokoukis, U.S. Economy

Is the US economy about to do something it rarely does anymore?


The US economy just might do something in the second quarter that it hasn’t done too often of late: grow at a 4% or faster annual rate, adjusted for inflation. Economists at Deutsche Bank are looking for 4.2% real GDP growth in the period. And OECD economists aren’t far behind with a 3.9% forecast.

Now it used to be fairly common for the US economy to post a quarter of 4% or faster growth. In the 1980s (1981-1990), there were 18 such quarters. In the 1990s (1991-2000), another 18 quarters. When a big economy like America’s is growing 4% or faster, it’s really cooking. Indeed, those two decades are recalled as ones when the economy snapped out of its 1970s malaise.

But in the 53 quarters since then, the US economy has generated only six three-month periods of 4% RGDP growth or faster, including just two (4Q 2011 and 3Q 2013) during the Not-So-Great Recovery.

Of course, the bad winter weather is playing big role here. Deutsche Bank: ” … we continue to maintain the view that whatever growth was ‘lost’ in Q1 due to inclement weather will be made up in the current quarter.” Although the first print of first-quarter RGDP showed a 0.1% gain, new data suggests the economy may have shrunk by 0.2% or so.

And for the rest of the year? Well, the OECD gives the bullish case:

Economic activity is projected to pick up in 2014 once the effects of severe winter weather dissipate. Given ample corporate cash flow and an improved demand outlook, business investment should accelerate significantly. Sizable gains in asset prices have boosted household wealth, which, combined with steady progress on the labour market, should provide support to private consumption and residential investment.

Fiscal contraction is creating less of a drag on economic growth, although further consolidation at a slower pace will be needed to ensure fiscal sustainability. Monetary policy appropriately remains very accommodative, with slack remaining in the labour market and inflation remaining weak. The Federal Reserve began the process of reducing the pace of its asset purchases, which should continue through most of 2014. It will be appropriate to keep policy rates low for some time, but they are expected to begin to rise by mid-2015.

The OECD expects growth to average 2.6% this year and accelerate to 3.5% in 2015. The big question, of course, is how fast the US economy can grow over the long-term. The new Obama budget accepts a “new normal” growth potential of just 2.3%, much like the CBO does. That compares to average growth of 3.5% from 1950 through 2007. If those White House and CBO economists are correct, we might not see too many 4% quarters in the future. It should be a primary goal of policymakers to nudge growth closer to the postwar average and away from that new normal forecast. We can do better — and should.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

3 thoughts on “Is the US economy about to do something it rarely does anymore?

  1. Oh boy! Another happy-face prediction about our virtual socialism economy! Comrades, I’ve heard this dozens of times already.

  2. But only if inflation does not rise above 1.7 percent or so. Otherwise the Fed is committed to suffocate the economy….

  3. Please consider the concept that derisking out of debt leveraged equity investments, and deleveraging out of currency carry trade investments, is going to stop any economic growth dead in its tracks.

    Liberalism featured the sovereignty of Banker Regime of democratic nation states, which provided policies of investment choice and schemes of credit in fiat money, producing seigniorage in Equity ETFs, and Credit ETFs, where the investor was the centerpiece of economic activity. Not only did Dividend Excluding Financial Investment, DTN, but also Nation Investment, EFA, and Small Cap Nation Investment, SCZ, figured prominently in the age of credit, through debt trade investing, seen in H&E Equipment Services, HEES, and United Rental, URI, and currency carry trade investing, seen in Eurozone Small Cap Dividends, DFE, and presented in their combined Yahoo Finance Chart.

    An inquiring mind asks what is the cost of a forklift from either one of the two aforementioned companies? This is a question implicit in the Robert P Murphy Econolog article The Importance of Capital in Economic Theory.

    Since the GFC, through money manager capitalism, we have had investors strongly buying the Small Cap Pure Growth companies, H&E Equipment Services, HEES, and United Rental, URI, the two providers of forklifts, which began trading lower in April 2014 on the failure of credit. These companies represent short selling opportunities.

    These providers of forklifts are toxic assets in the sense that they both have a Debt To Equity Ratio and a LT Debt To Equity Ratio that cannot be repaid, which suggests that the forklift providers are zombie companies.

    The price of forklifts to businesses is the cost of a business loan, that is interest, secured by inventory and other assets that can be claimed and sold; it is in this economy, that is the May 2014 economy, zero.

    These lynchpin companies became liabilities not assets to society, when they were transformed by Global ZIRP and became Frankensteins of the Creature from Jekyll Island. Once investors start aggressively disinvesting and derisking out of these and other debt leveraged and currency carry trade leveraged investments, economic deflation will commence; and what was in the age of credit, inflationism, becomes in the age of debt servitude, destructionism.

    With the death of fiat money, defined as Aggregate Credit, AGG, and Major World Currencies, DBV, and Emerging Market Currencies, CEW, the new money, that being diktat money, defined as the mandates of regional leaders to establish regional security, stability, and sustainability, will serve as the wheels for the economy.

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