The recent GDP report shows a much weaker economy than expected, and uncertainty in Washington could slow the economy even more. As unlikely as it appeared at the beginning of the summer, when the Fed was forecasting 3.5 % growth, we seem to be slipping toward another recession, or at least a quarter of negative economic growth.
The GDP report for the second quarter was horrible at only 1.3% and came with a sharp downward revision from 1.9% to a miniscule .4% rate for the first quarter. The biggest surprise was real consumer spending which contracted at an annual rate of 1.3%, the first decline since the second quarter of 2009. Even bright spots like business spending and exports grew at a slower pace. Government spending fell 1.1% as state and local spending fell faster than the increase in Federal spending.
Housing is depressed, 15 million people are unemployed, and there are signs of slowing in manufacturing. The ISM Manufacturing Index fell 4.4 percentage points to 50.9 in July from 55.3 in June, the lowest in a year. And there are continued signs of possible downgrades in Europe, most recently Spain, that could spread throughout the European and U.S. banking systems, tightening credit, and further slowing the Eurozone economies. Even in Asia, we are seeing clear signs the Korean economy is slowing sharply, and some slowdown in China as well.
We are flirting with a "double dip" recession unless we make economic growth our top priority.
The agreement on the debt ceiling bill, even if one has reservations, is a step in the right direction because it decreases the size of government without raising taxes. While this takes a big uncertainty off the table, it does leave behind the negative effects of fiscal austerity and a huge loss of credibility for Washington. I see no strong driver of economic growth coming out of the debt ceiling agreement.
The one huge positive force in the U.S. economy that could propel growth is the private sector's productivity and earnings performance and the cash that it has generated. Because of the extraordinary job done by American manufacturing and the private sector, we have seen roughly $2 trillion in cash on corporate balance sheets. Moreover, earnings growth for the S&P 500 companies is on track to deliver a gain of 18% for the first half of the year, and these strong earnings will continue throughout 2011. The backbone of our country is the productivity and earning performance of these companies, and the results have been the key driver of the economic growth we have managed to achieve.
It is time we recognized that the key to economic growth is manufacturing and the private sector, and not Washington. What Washington needs to do now is turn to pro-growth policies such as expanding trade and exports, investing in education and innovation, pro-growth tax reform, and a moratorium on new regulations. If we can move forward on these pro-growth measures in a bipartisan way, we can get back on track to increase productivity, become more competitive, create jobs and reduce the deficit.
Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute.