Uninspiring new normal

US GDP expanded at an uninspiring 1.5 per cent annual pace in the quarter to June, though the report accompanying the first initial estimate of growth contained positive details. Meanwhile, adjustments to prior years suggest America’s emergence from the 2009 recession has been sluggish, yet steady. Policymakers might wish otherwise, but they need to adjust to the new normal.

Revisions smoothed out the trajectory of growth in recent years, suggesting the 2009 recession was somewhat less deep than previously thought, while the three per cent economic growth rate initially reported for 2010 overstated the case by 0.6 percentage points. In short, the recovery has been decidedly anaemic throughout.

Even so, parts of the second-quarter report were positive. Non-residential investment increased at a 5.3 per cent annual rate while housing continued its recovery. Declining government spending, especially at state and local levels, dented headline growth. But private sector output went up at a reasonably robust annual rate of 2.2 per cent. Most encouraging, consumption growth was low and the savings rate ticked higher, suggesting that the economy is shifting toward a healthier, more sustainable state.

A big question, though, is whether anyone should be expecting growth to run much quicker. Emerging markets are taking an increasing share of global output. And non-farm business productivity growth of only 0.4 per cent year-on-year in the first quarter suggests there’s little potential for rapid acceleration. If a growth rate below two per cent is here to stay, policies that have focused on the short term require adjustment.

Among these are a monetary policy that has held interest rates near zero and an absence of a serious effort to reduce fiscal deficits — both unsustainable and distorting to the economy. Nearly four years on from the crisis, and with growth over the last three years steadier than thought, a shift is overdue.