Economist

Richard Iley

Macroeconomics

The debate around the US economy's sluggish growth performance since the global financial crisis (GFC) typically misses out the most important driver: unprecedented fiscal restraint.  Over the last seven years, total government spending has, on average, reduced y/y GDP growth by almost 20bp. This compares to an average positive contribution of c.45bp in the 30 years before the GFC. The result is that the share of government spending in US GDP has fallen to a 67-year low of 17.5% in recent quarters. The government's relative economic importance has not been this small since 1950.And this only captures the first order impact of anaemic government spending on aggregate demand. Unprecedented government job cuts will have also generated substantial second-order effects on growth. Almost 8 years into the recovery, government jobs are 1% lower than at the start of the recovery. By contrast, in the last four recoveries prior to this cycle, government jobs were, on average, 10% higher at the same stage. Relative to previous cyclical norms, the US economy is therefore currently 'missing' more than 2.45 million government jobs; equivalent to almost 16 months non-farm payrolls growth at 150k per month.The government job 'gap' will not only have depressed consumer spending but will have helped sustain the pessimism over future demand prospects which has a key role in dampening capital spending and entrenching slower productivity growth. Given the unprecedented headwind to the US economy from fiscal restraint this cycle, the performance of the private-sector in recent years can be viewed more constructively than the conventional wisdom holds.Real non-farm business GDP has averaged c.2% over the last five years, almost identical to its growth rate in the five years immediately prior to the last recession (2003-2007) when, of course, it was supported by surging private-sector credit. Real output of non-financial corporations, probably a better gauge of corporate sector growth, has averaged 2.8% over the last five also in line with this measure's performance between 2003 and 2007. Two conclusions stand out. Slower post-GFC GDP growth is perhaps less sinister and less structural than typically feared. Prospects for US growth accordingly may therefore be brighter than realised. Second, the need for greater co-ordination between monetary and fiscal policy is clear. Unprecedented fiscal restraint has placed unfair, and unhealthy, demands on monetary policy this cycle and worked to impede its room for manoeuvre when the next downturn eventually arrives.

The debate around the US economy's sluggish growth performance since the global financial crisis (GFC) typically misses out the most important driver: unprecedented fiscal restraint.  Over the last seven years, total government spending has, on average, reduced y/y GDP growth by almost 20bp. This compares to an average positive contribution of c.45bp in the 30 years before the GFC. The result is that the share of government spending in US GDP has fallen to a 67-year low of 17.5% in recent quarters. The government's relative economic importance has not been this small since 1950.And this only captures the first order impact of anaemic government spending on aggregate demand. Unprecedented government job cuts will have also generated substantial second-order effects on growth. Almost 8 years into the recovery, government jobs are 1% lower than at the start of the recovery. By contrast, in the last four recoveries prior to this cycle, government jobs were, on average, 10% higher at the same stage. Relative to previous cyclical norms, the US economy is therefore currently 'missing' more than 2.45 million government jobs; equivalent to almost 16 months non-farm payrolls growth at 150k per month.The government job 'gap' will not only have depressed consumer spending but will have helped sustain the pessimism over future demand prospects which has a key role in dampening capital spending and entrenching slower productivity growth. Given the unprecedented headwind to the US economy from fiscal restraint this cycle, the performance of the private-sector in recent years can be viewed more constructively than the conventional wisdom holds.Real non-farm business GDP has averaged c.2% over the last five years, almost identical to its growth rate in the five years immediately prior to the last recession (2003-2007) when, of course, it was supported by surging private-sector credit. Real output of non-financial corporations, probably a better gauge of corporate sector growth, has averaged 2.8% over the last five also in line with this measure's performance between 2003 and 2007. Two conclusions stand out. Slower post-GFC GDP growth is perhaps less sinister and less structural than typically feared. Prospects for US growth accordingly may therefore be brighter than realised. Second, the need for greater co-ordination between monetary and fiscal policy is clear. Unprecedented fiscal restraint has placed unfair, and unhealthy, demands on monetary policy this cycle and worked to impede its room for manoeuvre when the next downturn eventually arrives. 

US: Ain't Nuthin' but a 'G' Thang