5 things to know about US growth
Published on: Thursday, October 30, 2014
WASHINGTON: Is the U.S. economy accelerating – finally? If it is, which sorts of Americans stand to benefit most? And why is it doing better than other major economies?Such are the questions surrounding a report coming Thursday on economic expansion in the July-September quarter. It's likely to be the fourth quarter in the past five in which annual growth reached at least 3 per cent – a level that would be the envy of most other big economies. ADVERTISEMENT Some questions and answers to consider: Is the US strength for real?Probably so. Thanks to robust job gains, most analysts think the economy is finally emerging from five-plus years of stop-and-start expansion. They foresee growth at a healthy 3 per cent annual rate from now through 2015. If so, next year would be the first full year of 3 per cent growth since 2005 – two years before the Great Recession began. Keep in mind, though: Nothing is certain. Economists made similar predictions for 2014, only to see a brutal winter and a plunge in exports cause the economy to shrink at a 2.1 per cent annual pace from January through March. Growth did roar back in the April-June quarter. Still, for the first half of 2014, it was just 1.2 per cent. ADVERTISEMENT Why is the US outpacing others?Europe is on the brink of its third recession in seven years. Japan is faltering. Persistent weakness is slowing China, Brazil and other major economies.
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Even as the United States enjoyed a second-quarter burst of growth – a vigorous 4.6 per cent annual rate – the 18 nations that use the euro didn't grow at all. And Japan's economy, squeezed by a sharp sales tax increase, shrank 7.1 per cent.In China, the world's second-largest economy, year-over-year growth slowed from 7.5 per cent in the second quarter to 7.3 per cent in the third. That's still robust. But to keep things in perspective, growth in China had topped 10 per cent for three decades. Brazil's economy has been gasping after years of solid growth, partly because of slumping commodity prices.The U.S. economy is benefiting from a range of factors. The Federal Reserve acted more aggressively to stimulate growth than central banks in other countries did. The nation has significantly strengthened its financial system. The economy is relatively insulated from weakness overseas because it depends much less on exports than most other countries do. Is US growth historically impressive?The U.S. economy may look sizzling next to many other countries. But compared with its own history? Not so much. Though the recovery has proved durable into its sixth year, expansion has been the weakest of any post-World War II rebound of similar length.Growth has averaged just 2.2 per cent annually since the recession ended in 2009. Compare that with an average 3 per cent annual growth rate in the five years after the 2000-01 recession, 5 per cent after the steep 1981-82 downturn and 6.3 per cent after the 1961 recession. Who's really benefiting?Healthy growth doesn't necessarily serve everyone. For a typical U.S. household, income has fallen 2.9 per cent to $54,045 in the five years since the recession ended in June 2009, according to Sentier Research. That's partly because little of the economy's output is actually going to workers. Pay equaled just 42 per cent of GDP in 2011, a record low. It's recovered only slightly since then.Much of the economy's growth is instead being captured as corporate profits, which reached an all-time high of 12.6 per cent in 2011. Profits have barely dipped since then. As those profits have strengthened, so has the stock market, which disproportionately benefits affluent Americans.So what's driving growth?An unusual aspect of this recovery is that there's been no consistent driver of growth. At times, consumer spending has jumped. At other times, businesses have briefly ramped up spending on machinery, computers and software. In other cases, healthy exports or a burst of home building spurred growth. That's different from most recoveries, which are usually driven by housing, says John Silvia, chief economist at Wells Fargo. When the Federal Reserve cuts interest rates to spur growth, the resulting drop in mortgage rates usually boosts home sales and construction. Yet the Great Recession resulted from a housing bubble that peaked in 2006.Stay up-to-date by following Daily Express’s Telegram channel.
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So once the recession ended, there was little pent-up demand for homes. And since job gains and wage growth have been historically weak, it's been harder for potential buyers to afford a home. "Housing never really kicked in," Silvia said. "It's a very different ball game." –AP