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Another Downward GDP Revision Shows Economy Still Not Recovering

Posted By Salim Furth, Ph.D On September 28, 2012 @ 10:46 am In Featured | Comments Disabled

On Thursday, the Department of Commerce revised its second quarter estimate of economic growth (in terms of real gross domestic product, or GDP) down to 1.3 percent [1] from 1.7 percent.

Anything less than a 2 percent rate of growth is more typical of an economy wilting toward recession than an economy recovering from a recession.

Indeed, bad policies emanating from Washington are creating an environment where recession is more and more likely.

Taxmageddon, a $500 billion tax increase, waits in 2013 if Congress and President Obama fail to act. The Heritage Foundation has argued that uncertainty associated with Taxmageddon [2] is already dissuading businesses from investing [3] in capital goods and hiring new workers. Domestic uncertainty is compounded by uncertainty about the future of Europe [4].

Confirming our analysis, the Census Bureau measured a 13 percent fall in new durable goods orders [5] in separate data released Thursday. Orders of aircrafts fell sharply, leading an overall decline in investment.

Investment goods are vital to the economy. They not only reflect economic activity in the present; they also enable further productivity in the future. Fewer airplanes ordered imply fewer flights offered, fewer pilots and bag handlers employed, and fewer mini pretzels consumed.

Besides uncertainty, the federal government has pursued anti-growth economic policies that have prevented the economy from bouncing back from the Great Recession. As predicted by decades of economic research, the “stimulus” packages in 2007, 2008, and 2009 failed to have a positive effect on private economic activity. At the same time, the proliferation of federal regulations has stifled competition and dragged startup job creation to its lowest level ever recorded.

How can we measure the cumulative effects of the hostile growth environment created by Washington? One way is by comparing actual output to “potential output,” which is an estimate of how much the economy could be producing based on the number of workers and the technology available to them. In recessions, actual output falls below potential output. A typical recovery sees the economy rapidly shrink the “output gap” as it approaches, and sometimes exceeds, potential output.

The recovery that began in 2009 does not follow that trend. Instead, the output gap—which bottomed out at –7.5 percent—has narrowed to only –6 percent. Eleven quarters into the 1982 recession, sound economic policies had allowed the output gap to narrow to –0.6 percent from –8.1 percent.

[6]

Strong economic growth is not impossible. But with policies like the ones we have now, it’s not probable, either.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2012/09/28/another-downward-gdp-revision-shows-economy-still-not-recovering/

URLs in this post:

[1] down to 1.3 percent: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

[2] uncertainty associated with Taxmageddon: http://www.heritage.org/research/reports/2012/09/why-congress-should-stop-taxmageddon

[3] already dissuading businesses from investing: http://blog.heritage.org/2012/07/07/forecast-taxmageddon-would-cause-another-recession/

[4] uncertainty about the future of Europe: http://www.heritage.org/research/reports/2012/09/how-contagious-is-europes-economic-crisis

[5] 13 percent fall in new durable goods orders: http://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf

[6] Image: http://blog.heritage.org/wp-content/uploads/special-GDP-economic-recoveries.jpg

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