Are you trying to decide whether the U.S. economy's relatively weak performance in the first quarter of this year is just a proverbial "pause that refreshes," or whether it's a continuation of a trend of lackluster growth for the foreseeable future?
Here is what I think.
To sort this argument out, one has to look at two closely intertwined sets of factors. In an actual economic system these factors are inseparable and in a state of constant interaction, but I shall separate them here for the sake of clarity.
The first set consists of variables directly underpinning an economy's growth dynamics. The space of the second set is occupied by demand management policies.
Employment, household incomes and net exports are the key components of the first set. And the story they are telling us about the U.S. economy is not good.
Weak demand drivers
The officially reported unemployment rate of 6.3 percent in April vastly underestimates the true slack in U.S. labor markets. If one adds to the 9.8 million people on official unemployment rolls 7.5 million of involuntary part-time workers (people working part-time because they can't find a stable full-time employment) and 2.2 million people who dropped out of the labor force because they could not find a job, the actual unemployment rate is close to 13 percent.
More worrying perhaps is the fact that the labor participation rate (the percentage of population in the civilian labor force) of 62.8 percent is at the level seen during the stagflation period in the late 1970s.
Household incomes are faring no better. Over the last four quarters, the real after-tax personal income has grown at an average annual rate of only 1.2 percent.
Now, these employment and income data are directly underpinning household consumption and residential investment, which account for 75 percent of the U.S. economy. Is it any wonder, then, that over the last four quarters consumer spending rose only at an average annual rate of 2.2 percent, while the housing sector growth collapsed from a 15.1 percent increase in the second quarter of last year to 2.5 percent in the first quarter of this year?
And the damage does not stop there because these three-quarters of the U.S. economy are also influencing business investments on plant and equipment. The growth in that key segment of domestic demand was nearly halved over the last four quarters to an annual gain of 3.1 percent from 5.8 percent in the previous four quarters.
Can the U.S. economy get some help from external demand?