The nation’s economy grew during the months of July, August, and September, after a year of stagnation. The Commerce Department reported this week that U.S. GDP (the total value of all goods and services made within our borders) expanded at an annual rate of 3.5% in the third quarter, a major contrast from the 6.4% decline just two quarters ago. Peter Orszag, director of the White House Office of Management and Budget discussed how the nation’s economic picture might develop from here in an exclusive interview with Black Enterprise senior personal finance editor, John Simons.
Black Enterprise: Americans are seeing a lot of headline-grabbing economic data these days. Some of it seems to be trending positive. Other data points are still gloomy or less conclusive. Can you be our economic weatherman? What’s the status of the economy right now?
Peter Orszag: Well, to go with your analogy, the hail has ended. We will not have full, sunny skies until the unemployment rate is down. So the clouds are clearing, but people are still very wet. What I mean by that is that while today’s report is encouraging in the sense of showing positive economic growth, as is normal in an economic cycle, the jobs market remains quite weak. What you typically see as economic activity starts to pick up, the first place you see it is in productivity growth. Firms are reluctant to even expand the number of existing hours for their existing workers. And so you have higher output, the same amount of hours being worked and therefore, growth in output per hour. That’s what you saw in the second quarter, and actually in the first quarter you saw productivity growth of about 6% a year which is quite high. The next stage is that firms start to expand the number of hours that workers are working. What we’ve seen on hours is that in the work week hours are essentially flat after declining throughout late last year and early this year. And then the final stage is that employment starts growing. We’re not yet there, although the rate of employment loss has slowed. So, again we are not yet at a place where the sun is out and everyone is where they want to be–until we see that positive employment growth and the unemployment rate coming down.
ontent-ad2">How much of the current growth in the third quarter is the result of stimulus-related activity spurred by the federal government?
Well, the overall growth rate was 3.5% and you can take a variety of models. For example, Goldman Sachs suggests that the Recovery Act added 3.3%. Mark Zandi [economist and co-founder of Moody’s Economy.com] says 3.6%. The President’s Council of Economic Advisors also says 3.6%. The Congressional Budget Office gives a range of between 2% and 5%. So, average that and call it 3.5%. Basically, they’re all in the 3% to 4% range. Therefore one could say that all the growth in the third quarter is attributable to the impact of the recovery act. Another way of putting is, without the recovery act–given these estimates of its impact–the economy would have been flat rather that growing during the third quarter.
Does that mean the economy is on its own from here on out–unless we get a second stimulus package passed?
No. If you look out over time there are reasons to project continued economic growth, although with a weaker labor market. There are forces that continue to weigh down the economy too. Forces on the upside… there is a natural cycle to the economy and momentum tends to build. So one of things that happens is that in this report you did have strong consumption growth. That’s one of the keys to getting a self-perpetuating growth cycle, at least in the very short run. We also had strong investment and that’s crucial to a sustainable economic recovery. Consumption growth can kind of be the kindling wood that can get the fire of economic growth going, but to sustain it you need logs. Economic growth built by investment growth is more stable and long-lasting than a fire burning on consumption fumes.
What evidence is there out there that the economy can achieve strong growth without additional government stimulus?
Don’t forget that the Recovery Act will continue be injecting funds into the economy in the fourth quarter and into next year. One of the things about a recovery is that once it starts, it can create its own momentum that then builds on itself. As consumers become more confident, firms see their business prospects brightening. They invest in new plants and equipment, they hire more workers, and the process
becomes more self-sustaining. One of the things we’re carefully monitoring is whether that self-generating momentum is adequate to lift the economy out of this deep downturn that we were experiencing at the end of last year.So, if everything unfolds the way you foresee it, do you have any timetable on when the job picture might improve?
Rather than getting into that game, I think what I’d like to say is that the current state of the labor market is unacceptable in that unemployment remains too high and too many families are suffering. But rather than providing a sense of false precision of exactly when things will turn, I think the more important thing is to be working as hard as we can to accelerate that date.
What can be done in that regard? There’s talk of tax credits to businesses that do additional hiring. Is that something the White House is supports or is looking into?
I guess what I would say is that we are constantly analyzing options. We’re carefully monitoring the situation, and beyond that I don’t have anything more that I’ll say.
Thanks very much for your time.