The Lost Decade:GDP

Posted by: Michael Mandel on August 07

Oh guess what? You won’t be surprised at this.

The last decade has the slowest economic growth rate in the postwar period.

From the second quarter of 1999 to the second quarter of 2009, real GDP grew at a 1.9% annual rate. That beats (in a negative sense) the 2.0% growth rate for the decade which ended in the first quarter of 1983.

lostdecadegdpchart.gif

In fact, I think even that 1.9% growth rate understates how bad the past decade has been. There have been systematic problems in the measurement of real imports, so that the actual growth rate was probably significantly lower.

I think we need to wrap our minds around the fact that we’re not having a boom followed by a bust…we’re having a bad decade followed by a slow digging-out process.

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Reader Comments

Bill

August 7, 2009 08:57 PM

I think domestic corporate growth is understated because multinationals have, through transfer pricing routines, moved undervalued assets developed in the US oversees with their recognition of license income recognized abroad, not in the US, even through the R&D and patent work was done here. National income accounts can be very tricky, unless you believe foreign islands and tax havens are the hotbed of intellectual property activity. Now, the composition of GDP is also a problem. How much of our GDP was military and support equipment for wars? Take that out for all periods and look at GDP growth. Bad composition masking a bigger problem, unless you think that more military spending will increase our GDP numbers. For me, I would rather have it spent on healthcare and education.

Irate Reader

August 7, 2009 09:04 PM

Are you kidding me? I apologize for saying this but you sound like a hack for cherry picking dates to make up the insight. If I were to pick the bottom of the 99-01 recession and compare it with the top of the 06-07 period it might paint a rosy picture....
How about you stop cherry picking dates and data to make yourself sound knowledgeable to unsuspecting readers who trust BusinessWeek to provide good reporting and analysis.

Eric

August 7, 2009 11:50 PM

The GDP is also overstated because during the Clinton administration, the BLS changed the way it calculates the CPI. Since the 1990s, the cumulative CPI is 1/3 lower than it would be had the methodology not been changed. Reducing the CPI inflates the GDP. Had this change never been made, growth in GDP in the last decade would have been flat or somewhat negative.

Kartik

August 8, 2009 04:18 AM

The US population pyramid, for the first time, is starting to no longer be a pyramid.

This makes economic growth permanently poor, and means the US is going the way of Japan and Western Europe.

Among other things, this bodes ill for US real estate prices for the next 30 years.

The only forces that could offset this are :

1) Some massive technological disruptions that boost productivity a lot.
2) A big increase in immigration of SKILLED immigrants, to offset the aging Boomers. Again, SKILLED only.

Kartik

August 8, 2009 04:22 AM

Since 1999 and early 2000 had very high GDP growth, this figure will fall further as those years fall out of the 10-year trailing cutoff.

So 2011 will be the bottom of this 10-year measure.

Mike Mandel

August 8, 2009 06:11 AM

Kartik

>So 2011 will be the bottom of this 10-year measure

I hope so.

Paolo

August 8, 2009 02:47 PM

I agree with Irate Reader.
Picking dates and data in such a way is completely misleading.
Moreover, BEA published last Friday the revised data of GDP growth from 1929 to 2008 and it shows that US economy grew actually MORE than previously thought: +3,4% from 1929-2008 (+3,3% prevously reported), with average GDP from 1997-2008 at 2,8% (it was 2,7% before revisions).
I post the link at the end of my post.
From 1999 to 2008 the growth rate is as follow:
+4,8% +4,1% +1,1% +1,8% +2,5% +3,6% +3,1% +2,7% +2,1% +0,4% , that is on average +2,6%.
of course,adding to that the first half of 2009, the worst recession after the Great Depression, changes this data but i think it would be more honest to take the big picture.

Bill

August 8, 2009 03:05 PM

Regarding the change in the CPI calculation during the Clinton Administration, that was actually a change proposed by Alan Greenspan. It was also a change recommended by a number of economists who note that we do not by 8 track tape decks--in other words, that technological feature changes of product changes did not get reflected in price data. Nor do housing prices get properly reflected either through rental income proxies. Be that as it may: would you like inflation adjusted dollars to purchase products that were available in the late nineties? No you probably wouldn't want a cathode ray television or an inferior drug. But, you should ask: do you like the composition of your GDP. Do you like high levels of military spending? Do you like not only the level of GDP, but the wealth distribution changes that have concentrated wealth?

Business Week Reader

August 8, 2009 03:31 PM

Unfortunately, for the past decade the US has merely outsourced itself into a negative growth society. We flooded the market with lower skilled H1b/L1 visa holders and lost our competitive edge. The United States cannot innovate anymore, as our best and brightest have been removed from the engineering fields.

Joe Cushing

August 8, 2009 05:02 PM

It would be more accurate to measure back to Jan of 2002 than 1999. It's not 10 years but at least they are corresponding levels of the economic cycle. I've posted a similar comment on this blog before at least twice, so I have decided to use a picture this time. I uploaded a picture to photobucket here.
http://i71.photobucket.com/albums/i150/joecushing/wavewithlines.jpg

The wave represents the return on the stock market or economic growth or the growth of any economic indicator over time. Point A represent 1999. Point B is today. Point C is early 2002. As you can see a line drawn from 1999 to today does not match the slope of the wave but a line drawn from point 2002 to today does. If you are going to compare two times and then calculate the growth between the two, you will get a very distorted picture if: A. the times are somewhat close and B. the times represent different places in the economic cycle. The line CB represent our current growth rate much better than the line AB.

ScottD

August 9, 2009 12:31 AM

Couldn't some of this be driven by changing demographics? The rate of increase in the number of workers is slowing and in the long-term GDP growth should be driven by the change in labor supply plus the change in productivity. It would be interesting to see this chart adjusted to show the delta in GDP per capita growth or GDP/(# of people aged 15-64). Not 100% sure what it will show, but might be a worthwhile check.

cm

August 9, 2009 02:40 AM

Business Week Reader: I think you got your causality wrong, if I'm correctly reading you as saying "competitive edge lost due to outsourcing and labor market flooding".

The loss of competitive edge comes from business elites thinking they can milk a superior market position and sustain an edge while strip mining their human capital. Actually it is not restricted to elites -- sitting at the "bottom" of the value creation chain (performing original work rather than leveraging the work of others) is broadly considered undesirable when it is plainly seen how the spoils are allocated (the mantra of "more education" seems largely a euphemism for "don't end up a sucker relegated to labor in the trenches", but see below). The elites though, by definition, have the largest influence in setting policy. The outsourcing and "cheap" visa worker import themselves are only consequences of that underlying trend.

Another thing that came/comes into the mix is the inevitable "S curve". As technology and know-how improve, the bar rises ever higher, progress becomes ever more expensive, and attaining progress requires ever more complexity as most simple solutions have been found and most simple problems have been solved. (This also
relates to the education thing - an aspect of higher bars, as even a lot of trench work in tech requires, or at least benefits from, advanced technical schooling.)

In many of today's mature industries there remain many things that can be done better as a matter of principle, but it appears to be economically and socio-organizationally infeasible to get there, that is under current cost models the effort that would be needed exceeds the risk-adjusted returns. (And that's not just the "real" work, but all the management and coordination engendered by the complexity.)

An intimately related phenomenon is that many "tech" products are simply good enough, at some point. Look at cell phones. Clearly you can put this or that additional functionality into them, but do you really need all of that? If you are not willing (or able, with now declining loan issuance) to pay a substantial premium, vendors cannot economically implement or even develop the new functionality.

Or computer sound cards. That problem was essentially solved 10 years ago. In the absence of high-margin new features, a lot of ongoing product development effort goes into how to make the product cheaper to produce. Part of "cheaper" is cheaper labor, standardization, and more streamlined business process (required for outsourcing and managing large organizations).

The "bleeding edge" of today's computer industry appears to be in show-off gadgets (e.g. iphone) and "social media", which are largely platforms for public exhibitionism (self marketing), supposedly to be financed by advertisement and marketing purchasers. We'll see how that "attention economy" plays out.

But if it weren't for that, I don't know what today's "big thing" would be. I haven't heard much of the greatly hyped "biotech" lately. How far that "green tech" thing goes remains to be seen.

Mahmud Abbas

August 9, 2009 12:10 PM

As the demographics of USA resembles more and more that of Europe, its economy will also head that way and that direction is downwards. The only way USA can escape the "high income - old population " trap is to become the hub of technological leaps (not just technology increments) or by importing human capital to replace its aging population. The "skill" of the immigrant population does not matter at all as the prevalent education / work / constitutional systems in the USA will rapidly update the skill of any new immigrant.

TOM W.

August 9, 2009 12:14 PM

I can't speak for the tech or communications sectors of the economy, but as a project manager in the commercial construction industry, we couldn't build fast enough in the 10 year period you're speaking of.
If it was a "lost" decade, I'd sure love to see what a go-go era would be like.
I don't know a single construction company that didn't make more money than they've ever seen from 1995 right up until last year.
The one "off" year was in 2001, but that was short lived.
The only problem we've had is finding enough qualified, experienced people to work in our industry.
I DO think you might want to recycle this article for the next 10 years, however.
Between health care, cap and trade and the enormous deficit spending going on, the economy is 10 to 15 years away from being anything like it was.

dw

August 9, 2009 02:07 PM

this fits in with the fact that we have had no job growth since 2000. the 'recovery' from the previous recession never ever filtered down to the middle class or lower. and incomes have fallen back to 2000 also. so lower incomes for Americans and fewer jobs means lower GDP. business has been at wall streets urging removing as many jobs from the US as possible to drive their loan business (which was making up for the deflating income). well credit is dead for now. but incomes continue to fall. and eventually business will be wondering what happened to their customers (which they are already based on the recent reports from companies. almost 90% or more have had lower sales. but made profits based on cost cutting alone. which will not be repeatable. you can't have going concern based on cost cutting and reduced sales)

cm

August 9, 2009 05:41 PM

TOM W.: Your assessment is probably right. "But" a lot of the construction was credit fueled or otherwise speculative. Here in the so-called "Silicon Valley" (where much of the semiconductor related industries has been long offshored) there are a lot of not-so-prime "ghost" office parks, both mothballed old construction that for whatever reason seems to be unattractive (who knows, perhaps even asbestos or other issues) and new construction from dotcom or later that was never occupied. Some construction is still going on, but there is always an "overshoot" and a point of no return where it's better to finish the construction even without tenants/buyers.

max

August 9, 2009 05:43 PM

@tom w. I do not think you will ever again have to worry about a shortfall of qualified construction workers. The days of banks giving loans to people who could not pay the bank back is over due the banks running out of money. Now, the federal government is on its way to insolvency. The real winner in all of this is China who continues to do well because they make things. For us, sooner or later China will get tired of producing manufactured goods and then trading those goods for green colored paper. When China has had its fill of the worthless green paper we will not be able to buy squat. The last ten years have been the decade of increase outsourcing and increased importation of cheap labor which has impaired our ability to innovate. I have yet to hear anyone explain creditable how we are going to get out of this mess and return to a period of sustained strong growth. All I see is the government digging a deeper and deeper hole.

max

August 9, 2009 05:47 PM

@tom w. I do not think you will ever again have to worry about a shortfall of qualified construction workers. The days of banks giving loans to people who could not pay the bank back is over due the banks running out of money. Now, the federal government is on its way to insolvency. The real winner in all of this is China who continues to do well because they make things. For us, sooner or later China will get tired of producing manufactured goods and then trading those goods for green colored paper. When China has had its fill of the worthless green paper we will not be able to buy squat. The last ten years have been the decade of increase outsourcing and increased importation of cheap labor which has impaired our ability to innovate. I have yet to hear anyone explain creditable how we are going to get out of this mess and return to a period of sustained strong growth. All I see is the government digging a deeper and deeper hole.

logic

August 9, 2009 06:52 PM

Michael, how is infinite growth possible in a closed, finite system (the earth is finite in size)?

Rhetorical question here: is it possible that as we approach the maximma of the size of the worldwide economy, that the rate of growth will slow over the years? (I did say it was a rhetorical question :)

logic

August 9, 2009 07:19 PM

Mahmud is exactly wrong, I fear. The wave of unskilled/semi-skilled immigrants, legal and illegal, is overwhelming the limited resources of the U.S. What we need is *quality* of people, not quantity. Do we want to be like Switzerland (small stable population, highly skllled, prosperous) or India? Having been to both, I'll cast my vote for the sustainable Swiss model.

cm

August 9, 2009 08:16 PM

Logic: A not unsubstantial part of the "Swiss model" (though far from being their only business) is performing the role of the "neutral banker" assisting the wheelers-dealers and strongmen of the world in hiding their (often ill-gotten) loot from their compatriots, and/or providing shelter to affluent tax avoiders from high-tax jurisdictions. The same applies to all other small European principalities. Quite a few celebrities have been maintaining residences in Monaco etc. to spend some 183+ days outside their high-tax "home" country, or whatever standard the respective tax law sets to claim non-residency.
In not as many words, that's a viable but not scalable business and social model.

@Logic

August 9, 2009 08:19 PM

It's not immigration! It's the ponzi corporate culture of offshoring and outsourcing, H1B visas. What is GDP? Gross DOMESTIC Products. If they shift all productions overseas, what is left for GDP? How can you include H1B productsions as GDP? The GDP gigures are bogus. Real GDP figures are much lower!

Sandeep

August 9, 2009 09:37 PM

5 American jobs are created for each H-1B hired. If jobs is what we seek, why not lift the H-1B quota entirely? Why not allow the free movement of the worlds best brains in this land of immigrants?

America could quickly attract millions of the worlds best doctors, nurses, engineers, pharmacists, scientists, etc if H-1B quotas were eliminated.

Why should there be nursing shortages when qualified talent is readily available save for visa hassles?

Everytime I fly cross country, I am struck by the fact that the US is mostly empty land. So why not invite the worlds best and brightest to our shores? English speaking, highly educated, legal immigrants can only be a boon to this country. Do NOT confuse us with the unskilled illegals sneaking over the border by the millions. How many Indian gang members or drug dealers do you see in L.A. or San Jose?

It is very frustrating to see the agenda of highly skilled legal immigrants held hostage by supporters of illegal alien trespassers.

The solution is simple; eliminate barriers to the free movement of highly skilled immigrants (no unskilled) who can contribute to this economy.

If the US doesn't reform its immigration and visa polices soon, more highly skilled immigrants will leave for more inviting economies and contribute to their GDP, while competing against the US at the same time.

@Sandeep

August 9, 2009 10:00 PM

Good comment: "5 American jobs are created for each H-1B hired". This means that one sixth of US GDP is lost with H1B immigration.

cm

August 9, 2009 11:35 PM

Sandeep: "I am struck by the fact that the US is mostly empty land"

And there is a reason for that. Much of the empty land is not inhabitable by significant populations, mostly for lack of human consumable water or human tolerable climate conditions.

cm

August 9, 2009 11:37 PM

@Logic: H1B workers are performing domestic work, by virtue of working in the US.

econguy

August 10, 2009 11:10 AM

Shush, Krugman and the Dems might hear you. That would just inspire them to go waste another trillion dollars on their pet projects and programs in place of real stimulus and incentives for real growth and investment in the future.

TOM W

August 10, 2009 11:53 AM

Cm, yes there speculation WAS a factor in some commercial construction during the past decade; it always is.
But the majority was financed by real time balance sheets, and realistically projected revenues.
The construction industry is always doing a tightrope act between "pure" speculation and profit driven, "balance sheet" speculation.
When you think of it, all new commercial construction is, to some degree speculative, since 99.9% of it is financed, usually through short term paper.
If conditions change dramatically, the loan may have to be re-structured, sold or defaulted on.
Large industrial projects don't usually have a problem in this regard, as they almost always have cash reserves or other lines of credit to fall back on.
Virtually all retail is dangerously speculative in nature because it is totally reliant on local consumer spending and confidence.
Strip shopping malls are the most vulnerable to these variations as just about 100% are built on "spec."
I'm told by one of our biggest developers that the banks will not finance any new projects for strip mall construction unless the owner can produce signed leases to account for 90% of the property.
It's a very tall order to get someone to sign an ironclad lease for space in a building that hasn't been built yet.
Like any other business, the pendulum always swings too far one way, then the next.

Cthorm

August 10, 2009 01:49 PM

Let's all just pretend that we never took statistics and play ignorant. What makes a trend? The first and last data points. Do you have nothing else to write about, or are you just inclined to erode your credibility when it is fashionable to do so?

Lord

August 10, 2009 07:20 PM

You seem to have a number of reality challenged readers. This is not the difference between growth 10 years ago and growth now, this is the average annual rate of growth over the last decade, one that was worse than the 70s. The 00s were terrible for growth. It shouldn't take a genius to recognize that. One could as well say the 70s is cherry picking, which it is, since it hasn't been as bad as this since at least the late 50s (and probably the 30s if the chart went back that far). While we shouldn't expect as high growth going forward with the workforce stabilizing, we should hope it doesn't fall another 1%.

Mike

August 10, 2009 10:37 PM

The loss of competitive edge comes from business elites thinking they can milk a superior market position and sustain an edge while strip mining their human capital. Actually it is not restricted to elites -- sitting at the "bottom" of the value creation chain (performing original work rather than leveraging the work of others) is broadly considered undesirable when it is plainly seen how the spoils are allocated (the mantra of "more education" seems largely a euphemism for "don't end up a sucker relegated to labor in the trenches", but see below). The elites though, by definition, have the largest influence in setting policy. The outsourcing and "cheap" visa worker import themselves are only consequences of that underlying trend.

I really think this is dead on I love it! but dang!

Mike
mightyline tape

cm

August 10, 2009 11:13 PM

Lord: But then one can reasonably suspect that today's GDP numbers are exaggerated relative to a few decades ago, before hedonic adjustments. So it's quite likely even worse. We are getting fancier consumer products but the basics are deteriorating.

Ajay

August 11, 2009 05:51 AM

What's interesting about that chart is how remarkably stable the 10-yr growth rate is around 3%. The last time it dipped to 2% in the early 80s, a quick surge pushed it back to 3% within a year or two. I expect the same this time around, with growth coming from the internet. Of course, Obama and his fellow dimwits are trying desperately to waste as much money as they can in the meantime, but even they cannot screw this up. As for the real reasons for the dip, it's probably for two reasons. One is that free trade and technology have dropped the price of many goods, so people can buy more for less, doubt the CPI figures capture this adequately. For example, HDTVs or computers today are much better than 5-7 years ago but cost a fraction of their former prices. Even the price of food has continued to drop. People get music for free from each other rather than pay for it, listening to more music than ever in the process. They've been reading the news increasingly for free, as newspapers keep going out of business as a result. That brings me to the second reason, which is that most haven't figured out how to monetize the internet quite yet. Most people are too stupid to embrace the obvious solution, micropayments, so the internet continues to stay in its "free" ghetto. We'll get this fixed soon though. Finally, a lower growth rate in real GDP doesn't necessarily mean much, so what if we decide to produce and consume less? What matter are productivity and innovation, that we keep coming up with new ways to do more with less, and clearly we had plenty of that this last decade; we were just lacking it with one big and important sector, the internet.

Kartik

August 11, 2009 09:17 PM

cm wrote :

And there is a reason for that. Much of the empty land is not inhabitable by significant populations, mostly for lack of human consumable water or human tolerable climate conditions.

Nonsense. If cities like Las Vegas and Phoenix can be created out of the desert, then all US land that is not outright mountains is inhabitable.

In fact, LV and Phoenix are two of the fastest-growing cities.

South Korea has 46 million people in an area the size of Indiana. Britain has 60 million in the size of Oregon.

So yes, even if America's population was twice what it is now, America's density would be below the world median.

Sandeep wrote :
If jobs is what we seek, why not lift the H-1B quota entirely? Why not allow the free movement of the worlds best brains in this land of immigrants?

You are right. America is stupid to keep out trillions of dollars of knowledge capital. Particularly when there is such a oversupply of housing, and not enough people paying into Social Security and Medicare.

They are fools to not expand SKILLED immigration. SKILLED, mind you.

cm

August 12, 2009 10:27 PM

Kartik: Every metropolitan area gets (part of) its water supply from somewhere else. Just because LA, Vegas, Phoenix, the SF Bay Area etc. can ship in their water from somewhere else, that doesn't mean everywhere else it can be done too. For starters the somewhere else doesn't have that water anymore. I'm sure you can check out where major US cities get their water from, and where they discharge their waste water (and their solid waste).

I further suspect one major attraction of the US for the "best and brightest" is the promise of a "no worries" lifestyle. When you start corralling people, this leads to all kinds of issues, and in one way or the other a "no worries" lifestyle and economic environment cannot be sustained.

Why do you think "Europe" is "overregulated"? In good part because a higher population density means fewer exploitable land area and resources per head. "Europe" hit its environmental limits way before the US - deforestation, river/air pollution, paving shut of the land surface, river damming and flooding, etc. The only way out are controls on development and land use. Social controls have to be expanded when people cannot escape the pressure cooker of high-density settlements by heading to low density sprawl.

cm

August 12, 2009 10:36 PM

Kartik: In case it does not immediately follow from my previous comment, you cannot divide population by total land area but you have to adjust for inhabitable area (even in the populous Asian nations, desert are not significantly inhabited). By such a measure the US will probably still have much lower density, but I would suspect the relative gap would be smaller.

CompEng

August 13, 2009 09:51 AM

Cm,

Exactly. I think in many cases more socialistic tendencies do come in because the resources start to become highly contended and public good effects and other externalities start to become more prominent. This makes it very obvious to people that what they need to control their own environment or destiny is in someone else's hands, and so new compromises must be made. This is a different effect than the mooching conservatives fear.

Akhilesh

August 20, 2009 12:11 PM

It's quite clear why the GDP is not growing so fast. The US is a developed country. Of course, all growth will have to be incremental. Diminishing marginal returns. Remember?

It is high time people judged quality of life by real per capita incomes rather than its derivative.

And imagine how bad the emissions situation would have been if the US were growing at a china-esque 8%?


mulp

August 20, 2009 02:59 PM

The last decade proves the virtues of tax cuts and deregulation; since Bill Clinton signed the asset bubble creating capital gains taxes though the six or seven Bush economy and job killing tax cuts (depending on how you count them) we have seen how wonder low taxes and deregulation, and might I add, weak unions, have really created wealth and destroyed it, and created high incomes for a minority with declining wages for many, the good news being the flat wages for the middle class.

Can the myth of tax cuts, deregulation, and powerless unions being the key to great economic growth and the rising tide of this great economic growth lifting the poor out of poverty finally be discarded?

Wes

August 25, 2009 04:18 PM

Why would anyone today want to go into the technology field? This field has been decimated by competition from India. I have always been a big believer of the H1-B visa plan until I experienced the negatives myself. In the past 12 months, numerous American citizens have lost their jobs due to an Indian H1-B visa coming over and undercutting the wages. My coworkers bid on software projects and we cannot and will not compete with Indians offering the work for 1/3 of the cost. I personally blame short-sighted management for looking solely at the bottom line cost instead of the entire relationship paradigm.

These same companies that are offshoring the work will soon have no American consumers left to buy their products and services.

Ajay

August 25, 2009 09:04 PM

Wes, I don't see an Apple, Microsoft or Google in India, as they simply take the lower-level BPO-type work and provide a better value for companies here. That's great as it affords you an opportunity to work on higher-level work, like building a better craigslist or micropayments or voice recognition. If you can't compete on the lower-level work OR the higher-level stuff, perhaps you should go do something else. The market is nothing but a giant incentive system, one that has worked better than any other system for most of history. It's now incenting you to do higher-level work that the Indians do not do. If you simply choose to blame the Indians for outcompeting you on that lower-level work and do not take that step up, the market responds by punishing you. I'm sure you can do it, you just need to try.

Thank you for your interest. This blog is no longer active.

 

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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