$2.8 Trillion Missing from US Economy

3 June 2016 | by Sean Stannard-Stockton, CFA

The chart below shows real GDP (GDP adjusted for inflation) overlayed on a 3.1% trend rate. It shows how from 1966 through 2008, real GDP hugged the trend line quite closely. While dips such as seen in the early 80’s were rough recessions and lasted for a couple of years, subsequent strong growth brought actual GDP back up to the trend line.

 

Real GDP

But the post-2008 economic situation has been different. The decline in 2008-2009 was very deep, but the more notable aspect of the chart is that the 2010-2016 period has not seen the typical, post-recession accelerated GDP growth rate. Instead, real GDP has grown at just 2% or so.

The gap that has opened up between the trend line and actual GDP now stands at $2.8 trillion. Put another way, the economy would need to instantaneously grow a remarkable 17% to get back to trend.

This $2.8 trillion is “missing” from the pockets of consumers, businesses, and the government. When people talk about the “new normal” they are referring to the idea that the current 2% trend growth is the new, long-term trend line and we’ll never recover to the old trend line. Of course, this might be incorrect. Maybe we’ll see a strong acceleration in economic growth in the decade ahead. If you assume the old trend line still represents the potential of the US economy, then, in theory, we could see 6%+ annual real GDP growth for the next five years before things “overheated” as we began to exceed our economic potential.

The best economists in the world don’t know where the economy will go. But the chart above provides context for the current state of the economy. It highlights both the degree of persistent underperformance, but also the large reserve of untapped potential GDP growth.

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