The Recovery Loses Steam As GDP Growth Fails

The US economy may have grown at a 5.7% pace in the fourth quarter of 2009, but according to a survey of experts by Thomson Reuters a figure of closer to 3% is more likely this year. Some of the by-products of slower growth are obvious. Unemployment is not likely to come down as businesses remain reluctant to hire. Consumer spending will not be revived, at least by much. The federal government will have trouble in its effort to bring down the deficit if tax receipts stay low.

But, some of the results of very slow GDP growth are less obvious.

The remarkable recovery of Chinese exports has been based, short-term, on resupplying low inventories in the developed world, particularly the US. The deep recession and credit crisis kept many American companies from spending even if it meant their supplies of goods ran low. Further expansion of Chinese exports will rely on US companies which move from a period of inventory resupply to one of expansion. The same process is necessary to keep the export-driven recovery of the Japan economy on track as well. But, American firms will not increase their expenditures of products from abroad if those products cannot be immediately sold in the US.  A slow recovery of the world’s largest economy means a reversal of GDP gains in other countries, particularly China.

The deep economic problems of workers and small businesses do more than undermine receipts at the IRS. The social safety net has to catch and support more people as a moribund GDP forces unemployment to remain high and the need for jobless benefits to increase. Congress has already extended the length over which people can collect unemployment benefits. The extension will have to be renewed and probably lengthened again. Washington will have to spend more and more money on stimulus for the economy at a time when the revenue to the federal government is still falling.

One other critical effect of economic growth that hugs the flat line is that the incomes of many state and municipalities, which are already close to insolvency, will remain anemic. Critical government services and perhaps even the pensions which were promised to state and city workers may have to be cut. The last line of supports for these needs is, once again, the federal government.

This year was supposed to be the year that the recovery took hold. Next year, an improvement in the economy may be harmed by higher tax rates which are scheduled to go into effect on January 1. Almost any tax is a regressive tax when the economy is in deep trouble. Nearly every tax dollars is a dollar that does not go to improve GDP.

2009 was supposed to lead to a decade-long recovery of GDP growth. It won’t work out that way.

Douglas A. McIntyre