Is the Current Pace of Economic Growth the New Normal?
July 30, 2013
President Barack Obama began his economic policy tour last week, emphasizing the need to rebuild the manufacturing base, educate the workforce, and get the economy back on track. But with unemployment over 7.5 percent for more than 54 months, is it even realistic to expect a GDP growth rate over 3 percent and unemployment under 6 percent anymore? Is this the new normal?
Since the economic recovery began there’s been a pattern of bursts of growth followed by setbacks and hindrances. While some economic indicators are improving, there's little sign that the U.S. economy will kick into a higher gear of growth similar to pre-recession levels.
In interviews with IMT, several economists indicated that this may indeed be the new normal for the U.S. economy. However, it doesn’t have to be.
“I don’t see us getting back to this 3 percent GDP growth anytime soon,” Daniel J. Meckstroth, Ph.D., vice president, chief economist, and council director of the MAPI (Manufacturers Alliance for Productivity and Innovation) Purchasing and Division Finance Councils told IMT.
“The reading for the second quarter for this year is expected to be very weak,” added Alan Tonelson, a research fellow at the U.S. Business and Industry Council, which represents small and midsize manufacturers. “I think everybody will be real surprised if -- and this is a preliminary reading that will be revised twice more -- it is much more than 1 percent in real terms. That’s a very dismal performance when you consider the post-World War II economic norm is 3.2 percent to 3.4 percent.”
Meckstroth believes that to achieve economic growth we need more investments, more R&D, more innovation and more willingness to start business and entrepreneurship, and that “they depend on policies that affect those factors.”
According to Tonelson, the quality of growth matters. He insisted the previous decade’s “bubbles” -- the dot-com bubble and the housing bubble -- were clear lessons that economic expansion needs to be sustainable. “We paid very little attention to production,” he said. “We paid very little attention to savings or investment. And we nearly blew up not only the U.S. economy that way, but the entire world economy.”
With industrial production growing at roughly 1.8 percent over the last year, Chad Moutray, chief economist for the National Association of Manufacturers (NAM), sees the current rate of growth in the manufacturing sector as sub-par.
“In an ideal world you would have industrial production going up at least 4 percent or more. So we’re well below where we should be,” he told IMT.
Most economists interviewed by IMT agreed the energy sector is where the most potential for spurring growth lies.
“The natural gas boom is a game changer for the manufacturing sector,” said Terrence Martell, Ph.D., a professor of finance and economics at Baruch College. “The fact that our natural gas prices are substantially below what they are in other parts of the world is a huge advantage.”
Moutray echoed this sentiment. “If you look at the rest of this decade, North America itself could become one of the fastest-growing energy producers in the world. That enables manufacturers to benefit from lower-cost energy,” he said.
Martell also pointed to the lack of comprehensive tax reform as holding back growth. “U.S. corporate tax rates are considerably higher and that influences where people make investments,” he said. “Where people make investments, jobs occur as well. Look at all the money that is sitting in corporate balance sheets outside America.”
Moutray argued that the U.S. needs serious tax reform “so we can continue to make manufacturing in the United States much more competitive with the rest of the world.”
He added that a lot of policy changes would have to happen to get the U.S. back to pre-recession growth levels. “We’re pushing for increased opportunity for trade, not only pursuing the trade agreements we have in place, but giving the president trade promotion authority so we can continue to knock down barriers,” he said.
“When the trade deficit expands, it becomes a drag on growth,” Tonelson added. “The U.S. economy needs every bit of growth it can possibly get, especially since the kind of growth affected by trade is almost purely private-sector growth.”
Other key components for better economic expansions include a close monitoring of regulation and skilled labor, the economists noted.
Meckstroth said it is necessary to do a cost-benefit analysis of regulation, and ultimately slow the pace of new federal regulations, which has quickened progressively every five or so years. “There’s more and more regulations that affect manufacturing… they layer on top of each other, creating this regulatory environment that is stifling manufacturing activity.”
He also argued for a immigration reform. “We need skilled worker immigration. More immigration in the areas where there really are jobs… engineering, welding, skilled machinists,” he said.