Sectors at Root of Economic Weakness ; Analysis Finds 5 Areas Failing in U.S., Adding Up to Deficit of $845 Billion

By Irwin, Neil | International New York Times, August 6, 2014 | Go to article overview

Sectors at Root of Economic Weakness ; Analysis Finds 5 Areas Failing in U.S., Adding Up to Deficit of $845 Billion


Irwin, Neil, International New York Times


What would the United States economy look like right now if it were operating close to its full capability?

The world's largest economy keeps underperforming. Yes, new data last week on the nation's gross domestic product was better than expected. But the United States is still producing at least $800 billion a year less in goods and services than it would if the economy were at full health. As a result, millions of people aren't working who would be if conditions were better.

But why? Where is this gap coming from? To get at an answer, consider a more basic question: What would the economy look like right now if it were operating close to its full capability, and how is the actual reality of the economy right now different from that?

We started by examining how large a proportion of G.D.P. various sectors have accounted for historically -- over the two decades ending in 2013, to be precise. (Initially, we looked at the full history of G.D.P. data, going back to 1947, but the economy was sufficiently different in the immediate postwar period, compared with today, that it seemed more sensible to limit it to more recent history.)

Then we multiplied those percentages by the Congressional Budget Office's estimate of what the United States' potential output was in the second quarter of this year.

That gives us a sense of what output "should" be in each sector if the United States had a healthy economy and those historical proportions held.

As it turns out, six of the 11 sectors analyzed are doing fine, with output that is either stronger than or not too much worse than our model predicts. For example, consumer spending on services is exceeding the projection by $63 billion, with spending on nondurable goods undershooting by $74 billion. (Those numbers, like others contained in this analysis, are annualized.)

Business spending on intellectual property is a bit stronger than you would expect in a healthy recovery, spending on buildings a bit weaker. Trade is holding its own.

The following, however, are the five pieces that are the major culprits in the nation's economic malaise, each vastly undershooting what they would look like in our model of a healthy economy: residential investment; consumption of durable goods; state and local government spending; business investment in equipment; and federal government spending.

Together their deficit adds up to $845 billion, or almost 5 percent of total G.D.P. in today's dollars -- enough to add more than $2,650 in productive output for every man, woman and child living in the United States.

Let's take these five factors in failure one by one:

HOUSING is the biggest and least surprising, accounting for $239 billion, or 1.4 percent in missing economic output. We examined this sector's continued underperformance earlier in the year, but the short version is this: Even years after the housing bust, the United States is building far fewer houses than would be expected, given demographic trends. …

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