Why This Is Not Your Parents’ (Or Your Grandparents’) Economic Recovery

Our guest blogger is Adam Hersh, an economist at the Center for American Progress Action Fund.

Four years since the start of the Great Recession, the U.S. economy is picking up speed. The Bureau of Economic Analysis reported this morning that gross domestic product (GDP) grew by 2.8 percent in the last quarter of 2011. This marks the 10th consecutive quarter of economic expansion and the best growth performance for the US economy since the height of the Recovery Act in early 2010.

But beneath the headline growth figure, today’s report reveals that the nature of the Great Recession and current recovery departs markedly from historical experience. The difference: a debt hangover after years of bubble-driven investment that has left the economy much more fragile than it seems on the surface. This recovery is unlike previous ones experienced by your parents and grandparents, and it will require sustained policy action to ensure that a fragile recovery develops into strong and broadly shared economic growth.

Comparing the economy’s recent trajectory of consumption and investment with the experience on average of all other previous business cycles in the post-World War II economy shows the unusual depths to which the 2000s economy sank us and why recovery remains sluggish.

It’s true that consumer spending by households, the single-largest component of the U.S. economy, increased 2 percent in the past quarter. It’s now up 1.5 percent over pre-recession levels. But compared to previous recessions, the recovery of household consumption looks markedly weak. At this point in past business cycles, consumption on average had increased nearly 14 percent.

And the slow growth of consumption actually understates the financial stress faced by households: Despite growing in aggregate, personal consumption is actually 1.4 percent lower on a per capita basis than four years ago. Without critical social safety net programs, it would be even lower.

The persistently weak residential real estate market is further adding to the financial stress on families. Whereas in typical recessions residential investment tends to lead the recovery, up 23 percent on average at this point in the business cycle, at present it is languishing more than 45 percent below its pre-recession level.

With home prices yet to stabilize in most regions, owners coping with overvalued mortgage payments, and one in eight mortgages in foreclosure or delinquency, resolving weakness and uncertainty in the real estate market are central to boosting both household consumption and residential investment.

The economy is clearly not working for all Americans, either, with 13 million unemployed workers and countless middle-class and low-income families struggling financially. The gap left in consumer demand by financially stressed families is restraining private business growth and investment.

For a time, the Recovery Act and related increased public investment, services, and tax cuts helped fill the hole in demand. But in each of the past four quarters government fiscal contraction slowed economic growth by more than half a percentage point on average.

Small business owners surveyed by the National Federation of Independent Businesses report “poor sales” (i.e. lack of demand) as their number one problem for the past 40 months. With uncertain prospects for expanding sales, business investment, too, is far behind the pace of previous economic recoveries.

Investment in equipment and software grew incredibly through late 2009 and much of 2010 in concert with Recovery Act investments and tax incentives, but slowed to 5.2 percent growth at the end of 2011, primarily in information technologies. Four years later, equipment investment is 3 percent above its pre-recession level, but it’s more than 12 percent behind the pace of previous recoveries. Insufficient demand also constrains business investment in commercial real estate and factories, which is down 35 percent since the start of the recession.