Nearly five years since the start of the business-cycle expansion, the U.S. economy is still struggling to gain traction.
Compared to the prior three U.S. expansions, going back to 1982, the economy is recovering at merely 60% of that pace. (See Figure 1) Whereas at this point in past recoveries, the economy expanded by an average of 19%, today, the U.S. economy has grown just 11% overall since the economy’s June 2009 trough.
In past expansions, government spending continued supporting economic recovery, rising 20% for two years beyond the start of the upswing and leveling out only thereafter.
But the fiscal policy response in this recovery was much different. Instead of expanding to support the economic recovery, the January 2009 American Recovery and Reinvestment Act, or ARRA, and related measures merely to offset the sharp fiscal contractions experienced widely across state and local governments. As one-time spending from the ARRA waned, Republicans won control of the House of Representatives in 2010 and set U.S. fiscal policy on a downhill course.
As a result, rather than supporting economic recovery, the public-sector contraction has cut one-third of a percentage point per quarter from the growth rate on average since the start of the expansion.
The rest of today’s GDP report from the BEA shows that investment overall continues to basically keep pace with what has been seen in other recent recoveries, even though investment shrank 6.1% overall in the first quarter. Persistent U.S. international trade deficits also continue to pose a drag on the larger U.S. economy, although with fairly stable downward pressure.
Thus the lackluster growth that we are seeing nearly five years since the U.S. economy began expanding can be traced back to two main factors: the ongoing financial stress faced by most American families whose incomes are struggling to keep up with household demands; and the abnormal fiscal austerity that undermined government’s usual contribution to smoothing downturns and laying the foundations for the next round of economic growth — this despite the fact that fiscal deficits will fall back to just 2.8% of GDP this year.