Explaining Southern California's economy

Why better third-quarter U.S. economic growth isn't good enough

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A Boeing 787 Dreamliner aircraft at the company's factory in Everett, Wash. Building and selling more of these would improve weak U.S. growth.

The federal Bureau of Economic Analysis revised its estimate for third-quarter U.S. economic growth on Thursday. The news is good: the total output of the economy, its gross domestic product (GDP), moved up to 2.7 percent from an earlier estimate of 2 percent.

The upward revision isn't terribly shocking (if an economist gives you a shopping list, you can expect a revision by the time you get to the cereal aisle). But it is a nice surprise. It means that the economy grew more briskly in the third quarter – although it doesn't mean that U.S. GDP growth for the year will get its head above 2 percent total. For that, the country will need a pretty solid fourth quarter.

For the record, that's what happened last year. The fourth quarter came in at 4 percent. But the entire year averaged out to only 1.7 percent, because the other three quarters were so weak.

A number of economists have projected that the U.S. could be entering a period when growth between 2 and 3 percent – and closer to 2 than 3 – will be the norm. Cal State, Fullerton economists Anil Puri and Mira Farka made this argument the centerpiece of their 2013 forecast at a presentation last month in Orange County. Other economists in the Southern California region have echoed their outlook.

The positive thing about this prediction is that 2 percent growth is enough to keep the U.S. out of a recession, assuming there are no major shocks to the system.

The bad news is that in order to reduce unemployment rapidly – which now stands at 7.9 percent for the U.S. and 10.1 percent for California – 2 percent growth isn't going to cut it. Progress will require years. And, along the way, we could encounter a run-of-the-mill business-cycle recession, with companies pulling back on hiring and spending.

Let's not even get into the fiscal cliff. If the U.S. doesn't extend a mix of tax cuts and spending measures next year, GDP could lose up to 5 percent. Do the math. You can't lose 5 percent of GDP if you're only growing at around 2 percent.

The way economic cycles are supposed to function is that 2-3 percent growth in a developed economy is just fine, as long as that economy gets 5-6 percent growth coming out of recessions, in order to make up for the lost ground and restore production and jobs that were lost. But if GDP growth during recoveries only matches the historic trend...well, then Houston, we have a problem.

There are a couple of places to look for a boost to GDP growth. In the third quarter, a decent amount of that 0.7-percent upward revision came from government spending. Conservatives aren't going to like the idea, but adding to the deficit now could drive the growth we need to pay down the deficit in the future.

Corporations could also play a role. Right now, they're sitting on more cash than they ever have, more than $1 trillion. There are various reasons they aren't spending it, to build factories and hire workers and create innovative new products. These reasons range from simple fear of the future to a lack of worthy companies to buy – mergers and acquisitions activity has been tepid this year, according to USA Today.

A corporate tax cut could encourage companies to spend some of that cash pile. The U.S. corporate tax rate is now 35 percent, pretty high by the standards of highly developed world economies (Canada's, by contrast, is 15 percent). President Obama suggested during the campaign that the U.S. rate should be cut. But just as conservatives won't like more government spending, liberals aren't all that keen on tax breaks for corporations. 

No easy solutions, obviously. But not much hope for growth above 4 percent, either, if something isn't done to move the needle.

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