Economist Robert J. Gordon is the Stanley G. Harris Professor in the Social Sciences at Northwestern University and member of the National Bureau of Economic Research‘s recession-dating committee. In the following post, Gordon uses contribution to GDP to illustrate the arguments of the optimists and the pessimists about the future path of U.S. economic growth. (See a related graphic that illustrates this point.)

    (1) Both the optimists and pessimists are correct. What matters is the relative strength of the optimistic factors vs. the pessimistic factors.

    (2) If there were no pessimistic factors operating, we should have expected a strong V-shaped recovery like 1983-84. Because the pessimists are correct about elements of weakness in the economy, we are likely to get a recovery that is only half as strong, maybe a bit more, than 1983-84, in the range of 3% to 4%. (The annualized growth rate of real GDP between fourth quarter 1982 and fourth quarter 1984 was 6.4%).

    Here’s one way of pulling the case of the optimists and the pessimists out of today’s BEA release. These are contributions to real GDP growth and by definition these contributions must sum to total growth of real GDP of 3.24%.

    Optimists: total 5.06
    Personal consumption expenditures +2.55 (of this 1.40 was goods, 1.15 was services)
    Inventory change +1.57
    Producers durable equipment and software +0.83
    Federal government +0.11

    Pessimists total -1.82
    Residential structures -0.29
    Nonresidential structures -0.44
    State and local government -0.48
    Net exports -0.61

    What about the future? Clearly the contribution of inventory change is going to wind down to a smaller positive number. But both producers durable equipment and personal consumption expenditures seem to be picking up steam and are likely to be stronger in the second quarter than the first. The turnaround of employment from shrinkage to growth will inevitably boost growth in disposable income and thus in consumption. Producers durable equipment seems to be picking up as firms are replacing their IT equipment after a pause in 2008-09 when capital spending budgets were slashed.

    Also, one component of the pessimists’ case is likely to turn around soon, and this is residential structures. The BEA artificially distributes housing starts across subsequent quarters, so the negative for the first quarter of 2010 reflects the decline in housing starts that happened a year ago. Actual housing starts in the first quatyer were up 19% year over year and building permits were up 22%, according to National Association of Home Builders data.

    One point to note is that the federal government number doesn’t provide much evidence of any effect from the Obama stimulus. A big puzzle is why it is taking so long for the stimulus money to show up in the GDP accounts. The major downside risk for the economy is that the negative contribution of state and local government will get progressively worse.



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