Guest Post by “Davidson”
This observation may not prove overly useful to you in the short term, but I think it is worth while seeing where we are economically now that we have data going back 60yrs + which is relatively reliable. The 1st is from an editorial headline today in the WSJ, “The Six-Year Slough”, “New GDP revisions show the worst recovery in 70 years was even weaker.” The 2ndcomes from comments celebrating Milton Friedman's contributions to economic thinking. Had he lived he would have celebrated his 103 birthday this past week. Unfortunately neither has empirical support.
First, the WSJ is grossly mistaken in claiming that US growth today is worse than it has been the past 70yrs-see their chart below. What they did was to compare GDP today with GDP in prior periods. GDP in the past is grossly distorted by inflation. If GDP is not corrected for inflation, the comparisons are not valid. One must compare Real GDP to produce valid comparisons. One must use Real GDP to make historical comparisons.
Chart 1: From the Wall Street Journal “The Six-Year Slough”
The Real GDP history is shown in Chart 2: Real GDP Percent Annually with a trend line. Real GDP in the 1980s was about 3.2%. The 7%+ value in Chart 1 includes inflation. US Real GDP has grown from $1.2tril to over $16tril today. Our Real GDP trend is impacted by the law of large numbers, i.e. the larger something is, the slower it tends to grow. The trend line places US Real GDP growth just under 3% annually today. Yes, we are underperforming the historical norm. Part of this is due to an underperforming housing sector, but a crucial element of underperformance is due to government spending.
Chart 3: US Real GDP vs. Total Govt Expenditure&Investment shows today's Real Private Economy which is US Real GDP – Total Govt Expenditure& Investment = Real Private Economy. Total Govt Expenditure& Investment is a component of US Real GDP and one needs to subtract it our to get a clear picture of the Private Economy. Our Private Economy today is growing about 3.34% and roughly equal to our previous recovery. The slowness in US Real GDP today vs. our last recovery is mostly due to slowing Total Govt Expenditure & Investment.
