Never has news of economic decline been greeted with such relief. The announcement last week by the Bureau of Economic Analysis that Gross Domestic Product (GDP), adjusted for inflation, had fallen by a tenth of a percent in the fourth quarter of 2012 was almost universally taken to be good news.
Comments such as “it could have been worse,” “the decline was purely the result of a cutback in defense spending,” “the consumer is still spending,” “housing is back” and “business is investing” dominated the discussion.
While true, all these observations have the flavor of forced compliments, of saying, “Oh what a lovely presentation,” while thinking, “How am I going to force myself to eat this?” And combing the data can tease out as many negative findings as positive.
While personal income was up nearly 2 percent, compensation received by employees was up less than half that. The difference was the result of a nearly 9 percent increase in farm proprietors’ income and a nearly 17 percent increase in dividend income. Both of these items could just as easily be put in the one-quarter blip category, like the drop in defense spending.
The overriding fact is that for three full years, quarterly GDP growth has averaged less than 2 percent. And, more importantly, it hasn’t evidenced any trend, bouncing up and down between 2011 quarter four’s 4.1 percent increase to last quarter’s 0.1 percent decline. We’ve had four quarters of growth less than 2 percent, two quarters above 3 percent and six quarters between 2 and 3 percent. And all of this while the Federal Reserve is pumping trillions of dollars into the banking system.
Perhaps just dumping the money randomly out of helicopters would have been more effective.
So is there any good news in all this panning for gold in the stream of economic data? If there is any, it is in the intricate links between investment and consumption, between making big periodic purchases and making small every-day purchases.
On the consumer side of the economy, the vast bulk of the spending increase last quarter was for durable goods — vehicle purchases were up nearly 14 percent, home furnishings and equipment up nearly 27 percent. In addition, residential investment was up 4 percent. Food, clothing and footwear, gas and other energy purchases were all down.
On the business side, on the other hand, investment spending on structures was essentially flat while investment in equipment and software was up over 3 percent. The key question here is, “Will this investment translate into more hiring?” And the answer is, “Yes, with two caveats.”
First, will consumers, after they have refinanced the house, finally traded in the old clunker for a new car and replaced the old TV and couch — feel sufficiently confident to move on to non-durable goods, to update wardrobes, go out to eat, take vacations? And second, will businesses feel sufficiently confident about growing consumer spending to invest not just in more equipment and software but also in more people to operate it?
The reason employment has grown so slowly over the past decade is that it hasn’t come to be viewed as an investment, merely as an increasingly expensive cost. The key to moving our economy above the 2 to 3 percent growth range is to change the definition of hiring from incurring a cost to making an investment.
This change in thinking must penetrate both employers — I’m not just adding a cost to start my machines; I’m adding the ingenuity to make the most of my machines — and potential employees — I’m not asking for a job; I’m selling increased productivity.
If both sides of the labor market can make that attitude adjustment, our economy will start to grow, really grow.
Charles Lawton is chief economist for Planning Decisions Inc. He can be contacted at: