The Economy Just Grew 1.7 Percent, But It Should Have Been Much Better

The recovery has been weak, but it wouldn't be quite so if we stopped making it that way

The economy is growing, but it's not growing fast enough, and now we have new numbers to tell just how not fast that is. The initial estimate for second quarter GDP growth came in at a depressing 1.7 percent, which, even more depressingly, was actually better than expected.

Welcome to the recovery.

Of course, even this relatively good news came with a caveat. First quarter GDP got revised down from 1.8 to 1.1 percent, which made growth look better in the second quarter, but certainly not the economy overall. And that's coming off a fourth quarter in 2012 that registered just 0.1 percent growth. In other words, it's been 9 months of nothing but stall speed, if that.

Why?

Well, it's the austerity, stupid. For whatever reason, whether it's deleveraging or inadequate policy or both, recoveries from financial crises tend to be slower than from garden-variety recessions. But we've taken it a step further than inadequate policy with actively bad policy. Yes, we needed to stabilize the debt (as we have already), but we did so too fast and too soon. You can see that in the chart below that looks at what has added to (or subtracted from) GDP growth since the recovery officially began in June 2009.

A few things stand out. Yes, inventories have bounced around like inventories do, and our trade balance has generally been a net negative for growth, but business investment has actually increased at a decent clip. The real culprits of the weak recovery have been weak housing and weak government spending. Now, housing is easy enough to understand. There was the boom, and then the bust, but we didn't do enough to end the bust. We didn't write down underwater mortgages, and only belatedly refinanced them on a wide scale. But years of basically building no houses at all has actually left us with too few houses now -- so few that residential investment finally started adding to the recovery last year.

But the government has been taking it away. Back in 2010 into 2011, it was state and local government spending cuts adding a degree of difficulty to the recovery. Now, it's federal tax hikes and spending cuts doing so. Indeed, for all of the talk of runaway government sending us down the road to FEMA camps serfdom, overall public spending has actually fallen at its fastest pace since the Korean War demobilization. We've only avoided a pointless double-dip recession, because enough time has passed that households have rebuilt their balance sheets a bit, and the Fed has stepped up the monetary stimulus to offset some of the fiscal austerity. That's the positive spin. The negative spin is that we're still stuck in a recovery that still feels like a recession when we finally should have been getting the elusive catchup growth we've been hoping for.

Maybe next year, Godot.