REVIEW & OUTLOOK
October 26, 2012, 6:40 p.m. ET
Chronic Fatigue Economy
We borrowed $5 trillion and all we got was this lousy 1.7% growth.
The economy plowed ahead at a 2% growth rate in the third quarter, which thrilled more than a few of our liberal friends who think it's enough to re-elect President Obama. We'll soon find out if they're right, but there's no doubt their prosperity standards are slipping. In the third quarter of 1992, growth came in at 4.2% (3.4% for the year) and Democrats called it a catastrophe.
The third-quarter figure means that growth for the first nine months of 2012 has been a paltry 1.7%. That's slower than last year (1.8%), which was slower than the year before (2.4%). The current recovery has had only two quarters, but not a single year, with growth above 3%.
As problematic is where the growth came from and where it has gone missing. Consumer spending provided the most lift, perhaps helped by the asset burst inspired by the Federal Reserve's money printing. If Mr. Obama is re-elected, he should buy dinner for Ben Bernanke and the Fed Governors for their in-kind political contributions. The problem is that consumers can't continue to spend if the overall economy doesn't grow fast enough to raise incomes faster than it is.
The other big third-quarter growth driver was federal government spending, which rose 9.6%. Overall government outlays rose 3.7% and accounted for about 0.7 percentage points of the 2% overall GDP increase. Economist David Malpass calculates that growth in private output was closer to 1.3%. So much for the private economy "doing fine" and the government slumming for dollars.
An even bigger worry is that private investment tanked in the quarter. Non-housing related investment contracted by 1.3%. Housing did rally thanks to new home construction. But the decline in business investment at this stage of a recovery signals a capital strike and a return to pessimism. Business investment is a leading indicator of future job and wage growth.
Comparing this recovery from the bottom in June 2009 with previous rebounds continues to be very unflattering to Mr. Obama. Republicans on the Joint Economic Committee report that the typical growth rate at this stage of the previous nine recoveries (13 quarters) averaged 16.8%, and 19.6% in the Reagan expansion. The figure for this recovery is a meager 7.2%. That's about $1.2 trillion in foregone output. The budget deficit would be half as large today if this were a normal expansion.
The question is whether there is a reason to expect better in 2013. It's hard to see the investment outlook brightening when Democrats want to raise taxes on investment (capital gains and dividends).
.
Higher tax rates (to 41% from 35%) on small businesses and subchapter S firms won't help hiring. The National Association of Manufacturers says its members will shed factory jobs next year if Washington jumps off the tax cliff, and until recent months manufacturing has been one of the economy's few bright spots.
So this is the dreary tale of Obamanomics: Keep borrowing more than $1 trillion a year and keep the Fed printing money at historic levels, in return for mediocre growth and stagnant incomes. The alternative is to stop punishing the employers, investors and workers who are the real source of growth. The Romney plan to cut tax rates, reform the tax code, restrain spending and repeal ObamaCare would be a good start.
Mr. Obama will spend the next 10 days trying to persuade voters that 1.7% growth is the best we can do. If he's re-elected, he's probably right.
The third-quarter figure means that growth for the first nine months of 2012 has been a paltry 1.7%. That's slower than last year (1.8%), which was slower than the year before (2.4%). The current recovery has had only two quarters, but not a single year, with growth above 3%.
As problematic is where the growth came from and where it has gone missing. Consumer spending provided the most lift, perhaps helped by the asset burst inspired by the Federal Reserve's money printing. If Mr. Obama is re-elected, he should buy dinner for Ben Bernanke and the Fed Governors for their in-kind political contributions. The problem is that consumers can't continue to spend if the overall economy doesn't grow fast enough to raise incomes faster than it is.
The other big third-quarter growth driver was federal government spending, which rose 9.6%. Overall government outlays rose 3.7% and accounted for about 0.7 percentage points of the 2% overall GDP increase. Economist David Malpass calculates that growth in private output was closer to 1.3%. So much for the private economy "doing fine" and the government slumming for dollars.
An even bigger worry is that private investment tanked in the quarter. Non-housing related investment contracted by 1.3%. Housing did rally thanks to new home construction. But the decline in business investment at this stage of a recovery signals a capital strike and a return to pessimism. Business investment is a leading indicator of future job and wage growth.
Comparing this recovery from the bottom in June 2009 with previous rebounds continues to be very unflattering to Mr. Obama. Republicans on the Joint Economic Committee report that the typical growth rate at this stage of the previous nine recoveries (13 quarters) averaged 16.8%, and 19.6% in the Reagan expansion. The figure for this recovery is a meager 7.2%. That's about $1.2 trillion in foregone output. The budget deficit would be half as large today if this were a normal expansion.
The question is whether there is a reason to expect better in 2013. It's hard to see the investment outlook brightening when Democrats want to raise taxes on investment (capital gains and dividends).
.
Higher tax rates (to 41% from 35%) on small businesses and subchapter S firms won't help hiring. The National Association of Manufacturers says its members will shed factory jobs next year if Washington jumps off the tax cliff, and until recent months manufacturing has been one of the economy's few bright spots.
So this is the dreary tale of Obamanomics: Keep borrowing more than $1 trillion a year and keep the Fed printing money at historic levels, in return for mediocre growth and stagnant incomes. The alternative is to stop punishing the employers, investors and workers who are the real source of growth. The Romney plan to cut tax rates, reform the tax code, restrain spending and repeal ObamaCare would be a good start.
Mr. Obama will spend the next 10 days trying to persuade voters that 1.7% growth is the best we can do. If he's re-elected, he's probably right.
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