More than three years after the recovery began — in name, at least — the economy is still in a giant hole. But what, precisely, is still dragging it down? What sectors are the culprits? A simple model delivers some answers.
We can start by looking at the difference between what the U.S. economy is capable of producing and what it is actually producing, known as the output gap.
If almost all of the workers who wanted a job had one, factories were working at full speed and office buildings were full, economic activity would be $973 billion higher (at an annual rate) than it actually was in the third quarter.
That is the value of what we are not producing every year because so many factories are idle and so many would-be workers are on the jobless rolls. To see what parts of the economy are responsible for that lost activity, we can look at what proportion of gross domestic product each sector is historically responsible for and gauge their performance in 2012 compared with what would be expected in a world of full employment. (I used the average from 1985 to 2005, but these numbers are fairly stable, so the exact years used doesn’t make much difference.) The result is a simple model that tells us what sectors are underperforming and by how much.
The biggest single sector responsible for the weak economy won’t surprise anyone. Residential investment is a startling 49 percent below what would be expected historically, accounting for $370 billion in “missing” economic activity. This is what one would expect given that housing was a major trigger for the economic crisis. Yet that offers some hope — if housing just returns to its normal role in the economy, 38 percent of the output gap would disappear.
The next-biggest drag on the economy also makes sense. Spending on durable goods — think automobiles, furniture and large appliances — is 18 percent below what it would be in a healthy economy, accounting for $267 billion of the output gap. Americans are still dealing with debt and tighter credit; it is harder to get a car loan, for example, and people are more cautious about big-ticket spending because they are fearful about job prospects and paying down debts racked up in years past. The hole in spending on nondurable goods is substantial as well, at $127 billion. Consumers are holding onto their wallets — a continuing burden for the weak economy.
That said, data out Monday suggest that trends are pointing in the right direction for consumer spending. Personal consumption expenditures rose 0.8 percent in September, the Commerce Department said, as personal income rose 0.4 percent.
The third major contributor to sluggish growth is the pullback in business investment. Corporate America is spending 13 percent less on equipment and software than it would in a healthy economy, accounting for $174 billion in missing economic activity. Less investment in structures — think office buildings, factories and stores — accounts for an additional $69 billion loss. One of the most worrisome signs in Friday’s GDP report was that business spending on equipment and software, which had been improving for the past two years, stopped growing in the third quarter. That, combined with recent data on factory orders, means there’s a risk that this part of the economic gap is poised to widen.