Poor Q2 GDP and Future Expectations
July 27, 2012

The Entrepreneurial View

 

The Dismal Economy Should Not Create Diminished Expectations

by Raymond J. Keating

 

There’s no other way to put it: The latest GDP numbers from the U.S. Bureau of Economic Analysis were bad.

During a recovery, real U.S. GDP growth should be moving along at 4.0%-4.5%, on average. But during the second quarter, real GDP advanced by a mere 1.5%. That followed on 2.0% growth during the first quarter.

And for the past three years, from the time this so-called recovery started, real GDP growth has averaged a mere 2.2% – half of where we should be.

By the way, it needs to be pointed out that business investment is slowing. As noted in the GDP data, gross private domestic fixed investment continued a three-quarter slowdown - from 15.5% in the third quarter 2011 to 10% in the fourth, 9.8% in the first quarter 2012 and 6.1% in the second quarter. This is important to watch since consumers – indeed, the rest of the economy – take their cue from business investment. After all, if business is expanding, consumers gain in confidence, especially given the effects on the job market.

Two key problems exist with our persistently bad economic growth numbers.

The first is the loss in production, income, and jobs. Slow economic growth, quite simply, means a loss in our standard of living.

Second, the U.S. has to make sure that it does not fall into the trap of diminished expectations. After GDP numbers were released on July 27, a talking head on television said the U.S. economy was “resilient.” Really?

Continually poor GDP numbers for four-and-a-half years can have an effect on people’s psyches. They can start thinking that poor economic growth is the new normal. That is, they can succumb to diminished expectations. Suddenly, 2.0% economic isn’t so bad.

Make no mistake, the U.S. should not accept poor economic growth as some kind of new normal. Instead, if we make serious pro-growth policy changes, no reason exists why the U.S. cannot get back on a path of robust growth.

The necessary policy agenda to spur entrepreneurship, investment, growth and job creation forward is no mystery.

Provide broad-based, substantial, permanent tax relief. Similarly, roll back egregious, costly, anti-growth regulations, and establish a regulatory system whereby Congress must approve all new rules and regulations. Rein in the size and scope of government spending in order to leave resources for far more productive uses in the private sector, now and in the future. Lead the world in reducing trade barriers in order to expand opportunity. And get the Federal Reserve refocused on the only job it’s meant to do, i.e., maintaining price stability.

Get the policy mix right, and the U.S. will get back on a track of strong economic growth and job creation.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is “Chuck” vs. the Business World: Business Tips on TV.

 
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