GDP growth still not enough to get back to full employment

The U.S. economy grew at a 2.8 percent annual rate in the last quarter of 2011, according to Commerce Department data. That’s a little below expectations, but it also signals what most people already knew — the United States ended last year on a modestly upbeat note. (To put this in perspective, GDP grew at a paltry 0.7 percent in the first half of 2011.) On the other hand, it’s not fast enough growth to make a sizeable dent in unemployment. Here are five things to note in the GDP figures:

1. At this pace, unemployment won’t fall significantly. Ever since the financial crisis hit, “real GDP” (what the economy is actually producing) has been lagging way below “potential GDP” (what the economy could be producing, given our existing workforce and resources). That means the country needs some catch-up growth to get back to full employment. Dave Altig, senior vice president and research director at the Atlanta Fed, drew up a chart showing how much growth we’d need to get back to close the output gap. If the United States grows at just a 3 percent rate, it will take until 2020 to get back to full employment:

2. The winter growth was powered by auto sales. Much of the GDP growth was buoyed by 14.8 percent growth in the sales of automobiles and other durable goods. This is consistent with economist Karl Smith’s theory, explained by Matt Yglesias here, that an economic recovery is around the corner given that people have held back on purchasing cars and other manufactured goods during the slump, those goods are depreciating, and more people are getting ready to replace them now that the credit situation has improved. “Part of the forecast for improvement is that there’s a lot of pent-up demand in things like autos,” says Ben Herzon, an economist at Macroeconomic Advisers.

3. Government spending cuts are biting into economic growth. Government spending contracted a whopping 7.3 percent in the fourth quarter of 2011 — led by big cutbacks in defense spending. Had it not been for these cutbacks, the data suggest, growth in the last quarter would have been 3.7 percent. That’s the difference between “okay” growth and “good” catch-up growth that would make a meaningful dent in the jobless rate. It’s also a reminder that Congress can very much affect what happens in 2012 — especially since lawmakers still haven’t extended the payroll tax holiday or expanded unemployment insurance for the full year.

4. There are indications that growth will slow next quarter. Whenever digging into the details of the GDP figures, it’s worth looking for signs that the growth will sustain itself. For instance, it’s a good sign that personal spending on goods and services went up 2 percent last quarter, but not such a good sign that real disposable income is growing very slowly (at a low 0.8 percent rate). Likewise, a good chunk of the growth was due to businesses building up their inventories, which could herald a slowdown in production next quarter. (Most forecasters seem to be predicting a slight dip in the first quarter of 2012 at this point.)

5. These GDP figures always get revised. The current GDP numbers are just a first-pass estimate. These numbers will get revised at least twice in the months ahead. Sometimes they get revised very significantly (for instance, it took three years for the Bureau of Economic Analysis to figure out that the recession in the winter of 2008-2009 was much, much, much worse than anyone knew).