"Strong" Growth Ain't What It Use to Be

December 22, 2011

The NYT has a good piece noting factors that are likely to lead to somewhat stronger growth for the 4th quarter of 2011, but which will not be present in 2012. As a result, it suggests that we will see growth close to 3.7 percent in the fourth quarter, but this will fall back to 1.5-2.0 percent in the first half of 2012.

It is worth noting that even at a 3.7 percent annual growth rate it will take us until almost 2017 to get back to the economy’s potential GDP. According to the Congressional Budget Office, the economy is operating at about 6 percent below its potential level of output. With a potential annual growth rate of 2.5 percent, 3.7 percent growth GDP growth reduces this gap by 1.2 percentage points a year. That means it will take roughly five years of growth at this rate to close the gap.

Following steep recessions in the 70s and 80s, the economy had years of growth between 6-8 percent. In this context, a 3.7 percent growth rate does not look especially strong, even if it is more rapid than the economy is likely to see over the next couple of years.

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