Analysis: Economic growth figures not as rosy as they seem | Tatiana Bailey
This week, the second estimate for the U.S. economic growth rate as measured by gross domestic product, or GDP, was released, and it showed that the U.S. economy grew in the third quarter by even more than first estimated.
The first estimate showed a third-quarter growth rate of 4.9%, but it was just revised up to 5.2%. By way of reference, the U.S. economy has averaged about a 2% growth rate over the past 20 years. This means our economy grew at more than double the rate it usually does.
If you look at the detail in the GDP report, most of the growth was due to increases in consumer spending, business inventory investment, residential investment and government spending. I would say that consumerism and some persistence in homebuilding, in particular, have buoyed the U.S. economy for much of the post-pandemic recovery period.
If things are so rosy, why are so many economists still calling for a mild recession or at least a slowdown in growth for 2024? I’ve mentioned before that U.S. savings rates have fallen to the very low level of 3.4%, versus roughly 7% pre-pandemic. Yet many households continue to spend, which is driving up credit card usage and delinquency rates. This is also true for auto loans. All this implies the hurrah of consumer spending is likely to slow in 2024 — after all the Christmas shopping, that is.
But there is a nuance in the latest GDP revisions that I think is noteworthy. Gross domestic income, which is largely composed of wages and salaries, has been declining in the U.S. over the past four quarters.
Typically, as domestic income moves so does GDP, specifically because household income drives consumer buying power. But that is not the case in this cycle with real income at minus-0.2% year over year, and real GDP economic growth at a positive 3% year over year.
This is because of inflation. “Real” measures of growth incorporate inflation, and despite wage increases across virtually all industries over the past three years, consumers are not ahead. If we compare January 2019 prices on transportation, food and housing to prices this fall, all categories are up 25%-35%, according to a report by the Colorado Department of Labor and Employment.
Even though we are painfully aware of inflation, the pandemic-fueled wage increases and strength of the labor market have perhaps created a perception that the consumer is better off than he or she is and that is why households continue to spend.
This mismatch is one of the reasons economists like me are forecasting a contraction in spending and economic growth in the upcoming year.
Tatiana Bailey is executive director of the nonprofit Data-Driven Economic Strategies.
Tatiana Bailey
