They say in Washington that where you stand is where you sit, meaning views here are informed by partisan affiliation (ya think!?). For example, on the morning last week when the 1.9 percent GDP number came out, President Trump tweeted: “The Greatest Economy in American History!” CNBC’s Carl Quintanilla then posted a Trump tweet from 2012: “Q1 GDP has just been revised down to 1.9% … The economy is in deep trouble.” At least for Trump, 1.9 percent looks completely different from his current perch.
Sadly, these days, such skewed thinking goes well beyond Washington. We’re all, apparently, a lot more polarized and thus more likely to view numbers like this through partisan lenses. But perhaps for a few minutes, we can shed those glasses and try to take an unbiased look at 1.9 percent.
Before that, however, a big, important and hopefully obvious caveat: GDP ain’t everything, by a long shot. It’s an aggregate measure of the dollar value of what the economy produces, and it fails to account for both distributional outcomes — who gets what? — and environmental degradation. These are critical shortcomings of the way we measure growth, as I’ve written before. But given the economic and political saliency of GDP growth, it’s still contextually important and thus necessary to tease out its broader meaning.
The first way to evaluate a GDP growth rate is to understand where it is relative to its trend. Is the economy growing slower or faster than we’d expect? Such expectations are a function of the two big underlying inputs into trend growth: the labor force and productivity. The growth of the workforce and how productive it is determine the underlying trend of GDP.
Right now, that’s about 2 percent. And given the challenge measuring the value of the economy — the margin of error around any such estimate — you should consider 1.9 and 2 to be the same. So, the first thing to note is GDP growth is on trend.
So, what does trend growth mean for our everyday lives? Right now, it’s a good sign, especially given that a few quarters ago, there was talk of an imminent recession. Perhaps the most important relationship to recognize is that when real GDP is growing at trend, the unemployment rate should stay roughly around where it is, which, at 3.6 percent, is close to a 50-year low.
Another useful way to understand these dynamics is to think of the perpetual motion behind them. The U.S. economy is 68 percent consumer spending, meaning our economic fate is a lot more tied to spending than, say, China, where it’s 40 percent of GDP, or even Europe, where it’s 54 percent. Right now, even while wage growth has been a bit of a sore spot, robust job growth coupled with low inflation is providing consumers the resources they need to keep this virtuous circle going: Strong labor demand boosts consumption, which feeds back into more labor demand, i.e., jobs.
So is Trump right that this is the “greatest economy ever?”
First, the 2 percent trend is considerably slower than earlier periods. In the 1990s, it was about 3 percent, which, not incidentally, is the growth rate Trump’s economic team keeps incorrectly predicting. Remember those two key inputs noted above: labor force and productivity growth? Both have slowed, in the former case because of our aging population and flat immigration, and in the latter case … who knows why (economists don’t really know what speeds up and slows down productivity growth).
Second, there’s jobs, and there’s job quality; we’ve got more of the former than the latter. According to a recent survey, most workers say their current jobs are mediocre (44 percent) or bad (16 percent). One particularly concerning feature of the current economy is that in recent months, wage growth has plateaued at about 3 percent. That’s still beating (low) inflation, meaning the buying power of real paychecks is growing, but I’d expect wages to be accelerating if the job market was really as tight as all that.
This surely relates to the inequality issue, which, as I noted, GDP misses. In assessing how good the economy is, we must assess the extent to which that 1.9 percent of growth is reaching low- and moderate workers’ paychecks. In fact, low unemployment tends to boost the bargaining power of lower-wage workers, and we’ve definitely seen some of that in this expansion. But the recent stalling of wage growth suggests that large bargaining power deficits are still afflicting many in the working class.
There’s also a geographical dimension to the current inequality: The economy is leaving behind more places than was the case in prior expansions. Many of these places have fallen victim to a mode of globalization that lifts aggregate GDP but leaves behind formerly industrialized areas hit by import competition.
Trump’s trade war is also germane in this context, as it has clearly hit “tradable” sectors such as manufacturing. Last month, the sector recorded large job losses, but this was due to the now-ended strike at General Motors. Controlling for that, I estimate that factory employment is up just 4,000 per month this year, compared to 22,000 last year.
Notably, these weak manufacturing employment outcomes are concentrated in Midwestern states that will be electorally key in the next presidential election, much like they were in the last one, which might explain Trump’s misleading spin.
Bottom line: 1.9 percent GDP growth is a solid, if moderate, number, right on a trend that’s supporting a tight national labor market, which is, in turn, boosting strong consumer spending. Politically speaking, that’s far from the whole story, as many other moving parts, people and places are in play. But barring an unforeseen shock, I expect these conditions to persist through at least the next few quarters, if not beyond.
I think that’s good, if not great, but like I said, perspectives will differ.