In early May, Macroeconomic Advisers, one of major firms providing economic modeling and forecasting, released its projection for economic growth in the second quarter, and things looked pretty good. The firm projected that the U.S. economy was on track to show 3.7% growth in the second quarter, which would be evidence of a pretty healthy recovery.This is from Ezra Klein today:
Soon after, the projections were lowered. Then lowered again. Then lowered some more. As Europe struggled with debt crises, Japan struggled with the aftermath of a natural (and unnatural) disaster, state and local governments continued to scale back, and congressional Republicans took a sledgehammer to the American political process, the prospects for the second quarter kept getting worse.
Today, those fears were confirmed.
The economy grew less than expected in the second quarter as consumer spending barely rose amid higher gasoline prices, and growth braked sharply in the prior quarter, a government report showed on Friday.
Growth in gross domestic product — a measure of all goods and services produced within U.S. borders - rose at a 1.3 percent annual rate, the Commerce Department said. First-quarter output was sharply revised down to a 0.4 percent pace from 1.9 percent.
Economists had expected the economy to expand at a 1.8 percent rate in the second quarter.
It’s worth emphasizing that economic growth data for the previous two quarters were also both revised downward — by quite a bit. We thought the first quarter (January through March) was weak, but the revised number, 0.4%, suggests the economy barely grew at all. By that measure, the second quarter’s 1.3% may even look like progress.
But make no mistake, this is anemic growth. Coming out of the deepest recession in generations, we need much stronger and more robust growth to help get us back to where we were.
And that’s precisely what makes the current debate in Washington so infuriating. Instead of looking at the GDP numbers and rising unemployment as evidence of an economy that needs a boost, policymakers are engaged in a deliberate effort to take money out of the economy and focused on a debt crisis that doesn’t exist.
And with that, here’s another home-made chart, showing GDP numbers by quarter since the Great Recession began. The red columns show the economy under the Bush administration; the blue columns show the economy under the Obama administration.
Plenty of conservatives are peeking at this morning’s grim GDP numbers, as well as the downward revisions to previous years, and concluding that the stimulus clearly must have failed. “But remember,” snarks James Pethokoukis, “no matter how bad the economy is, Obama stimulus still created 3 million jobs, right?”Face facts, folks. The Republican economic policies are designed to destroy the economy, not to fix it. And the Republicans are succeeding in destroying the American economy.
That’s one way to look at it. Another is to dig a little deeper into the new GDP numbers, which tell a different story. As Moody’s chief economist Mark Zandi told me this morning, the revisions suggest that the recession following the financial crisis was much, much more severe than we’d thought—the economy actually shrank at a 8.9 percent annual rate the fourth quarter of 2008 and 6.7 percent in the first quarter of 2009 (earlier estimates had shown a smaller, 5.9 percent annualized drop across the two quarters).
Then, Congress passed the stimulus bill, the fall in growth dwindled to 0.7 percent in the second quarter, and, by the third quarter of 2009, we had 1.7 percent growth. “We went from negative to positive at precisely the time that the stimulus was providing maximum benefit in terms of tax cuts and spending increases,” Zandi says. “The numbers actually reinforce the importance of the stimulus in jump-starting a recovery.” What the stimulus didn’t do, however, was raise employment to the levels that the White House had predicted — partly because the economy was in worse shape than anyone, even the official data-crunchers, knew.
Of course, the stimulus only lasted two years, winding down in the end of 2010. And what happened then? As Dean Baker, an economist at the Center on Economic and Policy Research observes, “The downward revision to the first quarter data coupled with the revision of the fourth quarter growth to 2.3 percent from 3.1 percent, suggests that the winding down of the stimulus has seriously dampened growth.” Zandi agrees: “If fiscal policy had simply stayed neutral, the numbers suggest we would have had around 2 percent growth these past two quarters, which isn’t great, but it’s a lot better than what we actually had.” Except fiscal policy wasn’t neutral—it was shrinking. The stimulus wound down, that extra government spending started disappearing, and, with it, economic growth dwindled.