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We should be horrified at 1.7 percent GDP growth

When the Commerce Department reported the latest numbers on U.S. economic growth Wednesday morning, it was received with cheers. Gross domestic product rose at a 1.7 percent annual rate in the spring months! And that is a higher number, you may note if you are good at math, than the 1 percent that analysts had forecast. It is what markets and the journalists who write about them like to call a "huge beat."


The good news first: The economy is growing a little faster than economists had feared. And it seems to be relatively well-balanced growth, with personal spending driving the growth train (responsible for 1.22 percentage points of the total growth) and business investment and housing making significant contributions. Trade was a significant negative, as imports rose faster than exports, and government spending subtracted from growth for the third straight quarter, though less dramatically than in the recent past.

The economy also did better in 2012 than had been earlier thought. In the Commerce Department's re-benchmarking of data reflecting new calculation methods for GDP, the growth numbers came in at 2.8 percent, not the 2.2 percent earlier believed.

But the bad news is this: The better-than-expected second-quarter number came at the expense of a downward revision to estimates to the first part of the year, from 1.8 percent to 1.1 percent. Add in anemic growth (at only an 0.1 percent pace) in the fourth quarter of 2012, and we've now faced nine months of an expansion at a bit less than a 1 percent annual rate. Every two steps forward for growth seems to be accompanied by a step and a half back.

It would be one thing if that kind of slow growth was happening in a time of full employment, when the economy was basically sound. But with 7.6 percent unemployment, the nation could really use a few quarters in a row of 4, 5 or 6 percent growth to get us back to where people can really be pleased with the economy. It's not an outlandish view; that's exactly what happened in the early 1980s, in the aftermath of the last very deep recession.

What's holding things back? For the answer, let's compare the factors that spurred growth  in the second quarter of this year with the second quarter of 1982, a pretty typical quarter in that recovery and a period in which GDP rose at a 5 percent rate.

As the chart shows, business investment and housing are not the big culprits in why growth fell short last quarter compared with a typical quarter of the 1982 recovery; they're about the same. But in the earlier recovery, American consumers were picking up their pace of spending at a much faster rate. The trade balance was improving, making it a net contributor to the economy. And government spending was rising, amid the Reagan defense build-up and stable spending by state and local governments. This time around, however, government has tended to be a drag (and often more of a drag than it was in the second quarter).

Those of us who pore over government economic statistics have on some level become so accustomed to mediocrity in the U.S. recovery, and know enough about Rogoff-Reinhart (research showing slow recoveries tend to follow financial crises), and how much worse things are in certain other advanced nations (cough, Spain, cough) that we grade these economic reports on a curve.

The numbers may be objectively quite unimpressive, but after four years of seeing data almost exactly like this, we can only approach this report with a bit of resignation. The economy is doing about what we thought it was doing -- maybe a little better, maybe a little worse.

But 1.7 percent growth isn't good in the environment we're in, even if it is a little better than economists thought the number would be. It isn't even mediocre. It's terrible. It's a sign of the diminished economic expectations that economy-watchers have set for themselves that it's anything to crow about at all.