Category Archives: Long-Term Economic Growth

Why One Quarter’s Growth Tells Us Nothing

Published / by Stephen

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A good econ growth comment by Krugman. 

For the most part, reporting on 2nd quarter growth has been pretty decent. But I haven’t seen clear explanations of why one quarter’s growth tells us so little about longer-term growth prospects.

…the economy’s actual output depends both on its capacity – the amount it is capable of producing on a sustained basis – and the rate at which it is using that capacity. That is,

Output = capacity * capacity utilization

So what is going on? What is our capacity and what is our capacity utilization? The long-term and short-term are very different. To understand the long-term growth prospects you must answer two questions:

  • Why does capacity utilization fluctuate?
  • What leads to growth of capacity?

The answer to the first question is fluctuations in demand. The answer to the second question is investment and how consumer demand and economic policy affect the level of investment.

The real news is that we’re still waiting for both the investment surge and the wage gains the tax cutters promised; as far as we can tell, they’re never coming.