Is Moderate Growth the New Normal?
Jacobson, Margaret, Occhino, Filippo, Economic Trends
by Margaret Jacobson and Filippo Occhino
Since the end of the recession, the economy has expanded at a slow pace. Recently revised data show that real GDP grew 2.5 percent in the first year of recovery, slowed to a 1.9 percent pace in the second year, and settled to a 2.2 percent growth rate in the third. The economy missed out on the period of rapid recovery that typically follows business cycle troughs, and it has been growing quite steadily at rates lower than in past expansions. We examine the factors behind these subpar growth rates and present some evidence that moderate growth may be the norm going forward.
The current slow pace of expansion is the result of several factors pushing the economy in opposite directions. Factors that are moving the economy forward include high investment growth and stronger household balance sheets. Business fixed investment grew 10.3 percent in the last year, accelerating in the last several quarters. High rates of investment growth were fueled by solid profits and favorable bond finance conditions. Households made substantial progress deleveraging. Households' ratio of debt to assets declined from a 21.3 percent peak during the recession to the current 17.6 percent, as households reduced their liabilities, while their assets recovered. With stronger balance sheets, households were able to reduce their saving rate from levels above 5 percent to 4 percent, more in line with pre-recession levels, and this lifted one constraint on their spending.
For all of the improvement in business spending and household balance sheets, other factors continue to weigh down the expansion. The labor market remains weak, with slow employment growth and high unemployment, and this constrains household income and spending. …