By John Ross
SummaryA recent Wall Street Journal survey of economists revealed an average prediction of 3.2% US GDP growth in each quarter of 2011. This figure may be used to further clarify the analysis of US growth trends carried on this blog and discussion of the conclusions of Gavyn Davies, Jim O’Neill, and others regarding the issue.
A previous post noted the US economy has been slowing for several decades. The average growth rate currently projected for cyclical US recovery is insufficient to reverse such gradual but long term deceleration. The implications of 3.2% growth to the end of 2011 are that US GDP would have grown at an average of only 0.9% in 4 years of the current business cycle – substantially below trend to an equivalent point in previous post-World War II cycles. Such a 3.2% growth rate, even maintained for a 4 year period, would not reverse the US economy's long term deceleration.Therefore, unless there is a sharp acceleration of US growth above current projections, the trend of long term slowdown of the US economy will continue.
Trends in US business cyclesTo allow comparison of US performance during business cycles, Figure 1 shows quarter by quarter economic growth in each US cycle since 1973. The lines show the development from the peak of the preceding cycle, through the cyclical recession, to the final quarter of growth before the ensuing recession – the year indicated for each line is the starting one for the the cycle. For comparison a 2.5% annual growth trend line and a 1.7% annual growth trend line are shown – these being respectively average the 20 year and 10 year US annual growth up to the latest available US GDP data for the 3rd quarter of 2010. For the latest business cycle, starting in the 4th quarter of 2007, a 3.2% growth projection for five quarters after the latest available data, i.e. to the end of 2011, has been added.
It may be seen from Figure 1 that 3.2% growth to the end of 2011 would leave US GDP growth considerably below that in the equivalent stages of previous US business cycles. .
Taking comparisons, the 4th quarter of 2011 is exactly 4 years after the peak of the previous business cycle in the 4th quarter of 2007. Given 3.2% annualised growth until the end of 2011, US GDP in the 4th quarter of 2011 would be 3.4% above its previous peak. For comparison, after 4 years of the 1980 business cycle US GDP was 9.1% above its previous peak, in the 2000 business cycle the equivalent figure was 9.5%, after 4 years of the 1973 business cycle US GDP was 10.0% above its previous peak, and after 4 years of the 1990 business cycle US GDP was 10.5% above its previous peak.
Average growth over the cycles shows trends clearly. Annual US GDP growth after 4 years of the 1980 business cycle averaged 2.3%, with the equivalent figures for the 2000 cycle being 2.4%, for the 1973 cycle 2.5%, and for the 1990 cycle 2.6%. However, given an average 3.2% growth until the end of 2011, the annual average US GDP growth over the 4 years of the present US business cycle would only be 0.9% – self-evidently a significantly slow recovery in comparison.10 and 20 year moving averages
To show the effect of such performance on longer term US growth rates, Figure 2 shows the 10 year moving average of US GDP growth with a projection of 3.2% growth until the end of 2011. Figure 3 shows the same projection analysed in terms of a 20 year moving average.
As Figures 2 and 3 show the average economists prediction of 3.2% growth in 2011 would be insufficient to reverse the long term slowdown in US growth whether a 20 year or a 10 year moving average is taken.Considering the 20 year moving average, 3.2% US GDP growth to the end of 2011 would raise 20 year average US GDP growth to 2.7% from the present 2.5% – still below the 3.0% in the 4th quarter of 2007, before the current cyclical downturn commenced, and which was itself below the long term rate of growth of US GDP.
Taking the 10 year moving average, 3.2% US GDP growth to the end of 2011 would raise the 10 year average growth figure to 2.0% from the present 1.7% – still well below the 2.9% in the 4th quarter of 2007.Therefore it is clear that 3.2% growth in 2011 would be insufficient to reverse the long term deceleration of US growth.
Long term consequences of a 3.2% growth rateTaking a longer time frame, it is also clear that a much more prolonged period of growth rates at current projections would not greatly alter the situation regarding failure to reverse the gradual but clear long term slowdown of the US economy. To show this, Figure 4 illustrates the result of 3.2% US GDP growth maintained until the end of 2015, i.e. over a 4 year period, for a moving 10 year US annual average growth rate. Figure 5 shows the same for a 20 year moving average. It may be seen that in neither case would a reversal of the long term deceleration of US growth rates occur.
Taking figures, 3.2% US growth maintained until the end of 2015 would raise the 20 year moving average for US growth to 2.7%, compared to 3.0% in the 4th quarter of 2007, before the current recession, and raise the 10 year moving average for growth to 2.1% compared to 2.9% in the 4th quarter of 2007.Even a 4 year period at currently projected growth rates would not reverse the long term slowing of the US economy. Only if there were an acceleration of US growth rates to levels significantly above those currently projected would the gradual but progressive slowing of the US economy be reversed.
ConclusionAnalysis of prospects for the US economy has tended to concentrate on “spectacular” or short term trends such as predictions of double dip recession, Japan style prolonged stagnation, or fast cyclical growth. The fundamental trend in the US economy, however, is its long term slowing
from its historic growth rate. Current projections for US growth rates would not alter this deceleration.