August 2, 2002
U.S. Economic Growth: Speed Bump or Course Change?
Sometimes the best way for a struggling young attorney to make a name for him or herself is to take on the case of defending a particularly loathsome villain. There is something noble about keeping an open mind on a question that the public has already decided on. You can also draw more attention to yourself when you disagree with the crowd.
Perhaps there is a young economist among us who can argue the case that all is well with the American economy. It may not be as tough as, say, springing a defendant on trial for murder. But it is a view that many would find fault with.
The latest news on the economy puts the once-robust recovery in serious doubt. The Bureau of Economic Analysis' report onGross Domestic Product shows that the overall economy, as expected, cooled off in the second quarter of 2002. But the magnitude of the deceleration -- all the way down to a mere 1.1 percent growth rate -- as well as the substantial downward revision in the first quarter's growth estimate caught us by surprise.
During the recent weeks of financial market volatility, we could at least take some comfort in the thought that the "real" economy of goods and services was in better shape. Now the evidence of that is a lot murkier.
As expected, the second quarter GDP report portrayed a pattern of weakening consumer spending. The 1.9 percent rate of increase reported in overall consumer spending was in line with expectations, unwelcome as it may be for retailers and manufacturers. But business spending has yet to get untracked, with business fixed investment showing a negligible increase for the quarter. And the pickup in exports supported by the weakening dollar was simply not enough to do the heavy lifting needed to sustain the overall pace of expansion.
The second quarter report was the first to clearly indicate the magnitude of the state government fiscal crises as well. Despite the recent surge in federal government spending, which expanded at a 7.4 percent clip in the April-June period, overall government spending only managed 1.8 percent growth in what, for many states, is the final quarter of the fiscal year. The drag on the economy caused by the collective tax hikes being implemented by many states is a new concern for national policymakers.
If the July employment report is any guide, the economy isn't exactly setting the world on fire in the third quarter either. The Bureau of Labor Statistics reported that payroll employment growth in the 130 million-job U.S. economy was a mere 6,000 jobs in July, which is almost too small to measure. At least that is not a new trend -- net employment gains have been minimal in the overall economy since February.
The dominant story in the U.S. labor markets -- weak hiring in once-booming business services industries -- remained unchanged in July. In the days of 200,000 job per month increases in services industries employment, small downticks like July's 30,000 job decline in construction industries hiring would have been lost in the noise. But with services growth only a shadow of its former self, that decline is enough nowadays to bring overall job growth down to zero.
There's hope, of course, that growth in the economy will continue uninterrupted through this speed bump. But flying as close to the ground as we appear to be, there's concern as well.
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