Economic Growth Is Below Trend: Is Stagnation the New Normal?
The economy stumbled in February, according to the Federal Reserve Bank of Chicago’s National Activity Index (CFNAI). The index’s three-month moving average fell from +0.02 in January to -0.18 in February, its first negative reading in six months, suggesting below-trend economic growth.
But the decline in the three-month moving average is somewhat misleading. The headline index actually moved up from -0.45 in January to +0.14 in February. A strong reading of +0.75 in November, which was dropped from the moving average calculation this month, propped up negative results in January and December. Taken in isolation, February’s numbers were actually OK — they were just not good enough to compensate for weakness in the previous two months.
Fifty-four of the 85 individual indicators tracked by CFNAI made positive contributions to the index in February, while 31 made negative contributions. Fifty-one of these indicators improved month-to-month, while 33 declined and one remained unchanged. Both production and manufacturing output indicators increased in February, and manufacturing capacity utilization increased from 75.9 percent to 76.4 percent.
Employment indicators were down, contributing -0.02 to CFNAI in February. The Chicago Fed made note of the fact that the headline unemployment rate edged up 0.1 percentage point and that nonfarm payrolls increased by 175,000.
This idea of below-trend economic growth was recently popularized by former Treasury Secretary Lawrance Summers. Speaking at the World Economic Forum in November, Summers suggested that the economy could be facing the specter of secular stagnation, or a prolonged period of slow economic growth, much like the recovery that the U.S. has meandered through over the past five years.
The negative three-month CFNAI is consistent with this idea. Moreover, U.S. gross domestic product is more than 10 percent below where the Congressional Budget Office projected it would be before the financial crisis toppled the economy. Labor force participation has plummeted about 3 percentage points, and the share of Americans working has fallen. All this points to the same idea: The economy may be stuck at a lower gear.
These problems have been compounded by accommodative monetary policy, which critics have argued has done little to increase real economic productivity but has done much to fuel an unprecedented rally in equities. This has led to a lot of bubble talk in the economic echelons.
“Some have suggested that a belief in secular stagnation implies the desirability of bubbles to support demand. This idea confuses prediction with recommendation. It is, of course, better to support demand by supporting productive investment or highly valued consumption than by artificially inflating bubbles,” Summers wrote in a December op-ed for The Washington Post. “On the other hand, it is only rational to recognize that low interest rates raise asset values and drive investors to take greater risks, making bubbles more likely. The risk of financial instability provides yet another reason why preempting structural stagnation is profoundly important.”