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U.S. economy grows 3.6% in Q3

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On December 5, the Commerce Department released revised growth rates for the third quarter of 2013. The news that the annualized growth rate had increased from 2.8%, a rate that marginally exceeds population growth, to 3..6% a rate that, if sustained, could help clear up some of the unemployment glut in the labor market, will be seen by many as a strong economic sign.

Unfortunately, this view may be premature, because there are indicators below the headline growth rate that seem to suggest that this may not be the beginning of a trend, but simply a statistical noise. The first major problem is that the Bureau of Economic Analysis notes that much of the GDP gains were produced by private inventory investment. This in not inherently bad, but if demand does not begin to increase, that inventory will be all that is required for an extended period, and private businesses will not any more inventory for several more months, preventing this level of output and economic growth to continue.

Another issue is the fact that consumer spending grew at its slowest pace since 2009. Consumer spending makes up nearly two-thirds of the American economy, but in order for people to spend money, they have to be confidant that their economic circumstances will continue to be similar to what they are now. If people are concerned that their job is at risk in any fashion, they will save more money than normal. This is a perfectly rational response (Keynes called it the Paradox of Thrift), but one that is harmful in the economy as a whole.

One of the key factors driving this period of anemic growth has been the lack of demand that resulted from the bursting of the housing bubble essentially removing trillions of dollars in wealth people believed they had from the economy. There have been some who have countered this and claimed that the problem is not demand, but simply that the skills of the American labor force are not the skills that modern employers need in a globalized marketplace. If this were true, than the inflation that these proponents of structural unemployment warned us about would have occurred over the last five years.

The problem, as it turns out, is not that the American labor force is unequipped to deal with the jobs that are available, but that ideology driven individuals are unequipped to deal with the fact that government can be helpful to the marketplace during periods of economic malaise.



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