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Author Topic: The U.S. economy contracted 0.7% in the first quarter of 2015  (Read 359 times)

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Hollywood

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http://blogs.wsj.com/economics/2015/05/29/grand-central-gdp-revisions-show-economy-exposed-to-shocks/
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The Commerce Department is widely expected to report this morning that U.S. economic output contracted in the first quarter, the third time in this expansion that the economy, in fact, failed to expand. What are we to make of this?

My colleague Greg Ip provided the most useful analysis I’ve seen earlier this week. “Germany and Japan have shown over the past decade how a country’s growth can easily slip into negative territory when the underlying trend is so close to zero. The U.S. is fitter than either country but, like them, is grappling with cyclical and structural headwinds that could make negative quarters—and recessions, too, if policy makers aren't careful—more commonplace.”

Greg points to this illuminating set of facts: U.S. growth has averaged just 2.2% since the recession. For comparison, between 1983 and 2007, the economy grew at 3.2% on average.  The economy experienced just four negative quarters during the 1983-2007 stretch. If the underlying trend had instead been 2% while quarter-to-quarter swings remained the same, there would have been 13 negative quarters.

The slow underlying trend of U.S. growth appears to be held down by slow growth in worker productivity and the labor force. These are developments that Fed interest rate policies can’t easily change. Their roots lie in factors like worker education, entrepreneurial innovation, regulatory policy, the quality of national infrastructure, business investment and the age and willingness to work of the labor force.

These factors reside on the supply side of the economy – they influence the economy’s productive capacity. Fed policies more directly influence the demand side of the economy – our willingness to spend and invest today.

If policy makers want to bolster the economy, wise choices will need to start coming from somewhere other than inside the central bank.
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