America's economy: Distress signal: BEA revised its national accounts numbers back to 2007 for this release, and the picture revealed is far darker than anyone previously believed. From 2007 to 2010, real output declined by 0.3% per year on average. Previously, BEA had estimated annual growth of 0.1% over that period. The decline in output during the intense period of financial crisis was significantly more severe than economists had thought. In 2008, the economy shrank 0.3%, rather than holding flat, as earlier estimated. In 2009, the economy shrank 3.5%, worse than the earlier 2.6% projection. During the ugliest months of the crisis, in the fourth quarter of 2008 and the first quarter of 2009, output declined at a shocking 8.9% and 6.7% annual pace, respectively. It is now clear that the American economy has yet to reattain its previous peak in real output, achieved three full years ago.
If nothing else, this awful report helps to solve a number of lingering mysteries…. Arguments that unemployment must be structural, given the failure of projected growth rates to generate new hiring, now look silly. Projected growth rates were simply overstated…. Those overly optimistic assessments of the likely impact of interventions… also make much more sense now. Policymakers were fighting a fire far more intense than they recognised.
Of course, the previous underuse of countercyclical policy suggests that it's more important than ever to get policy right now. Unfortunately, Washington is failing miserably on this score. Policy stances that were inadequate before now look dangerously tight. The Federal Reserve should have all the excuse it needs to reconsider its decision to halt purchases of government assets. Despite all the warnings about inflation, the core Personal Consumption Expenditures price index, which the Fed follows closely, rose just 1.3% in the year to the second quarter. That's far too low.
Meanwhile, Congress' behaviour looks incredibly reckless…. [W]hile America needs to address its medium- and long-run fiscal challenges, immediate austerity would be a mistake. The dire economic situation undergirds this point: Washington should delay immediate fiscal cuts…. Instead, it seems as though the best possible outcome of the current debt-ceiling impasse is a deal which hacks away at current spending, increasing the government drag on growth. The risk remains, however, that Congress will fail to reach a deal in time…. Given consumer anxiety, the risk of a catastrophic government failure, however small, isn't helping.
And of course, there is no shortage of trouble elsewhere. All signs indicate that now is the time for policymakers to rush to the tiller and pilot the ship quickly and decisively back on course. Instead, leaders have left the economy adrift, even as rocks loom ahead.