That 'expanding' economy: the White House description is off the mark
North Egremont, Mass.
Every announcement of a new quarterly gross national product (GNP) figure is the occasion for a pronouncement as to its meaning for the future of the economy.Skip to next paragraph
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The latest such pronouncement deals with the third-quarter figure. White House spokesman Larry M. Speakes is quoted as saying, ''The economy has moved out of the recovery phase and into expansion.'' That sounds as if the economy really is beginning to grow again. It is not.
When the first-quarter 1983 GNP figure was published, the widespread cry was that the economic recovery from the 1981-82 recession was feeble. It wasn't.
With the report of the unusually strong increase in second-quarter 1983 GNP, the hubbub was that the second quarter reflected an increased momentum that would spur the economy on to even greater gains in the months ahead.
The third quarter has, in fact, turned out less strong than the second-quarter spurt.
So much for earlier popular pronouncements.
What about the current ''moving into expansion'' pronouncement?
Language for describing movements of the economy is not very precise. We hear of contractions, recessions, slowdowns, downswings, recoveries, expansions, upswings, booms, busts, speedups, long-term growth, negative growth, growth cycles, etc.
The National Bureau of Economic Research is the generally accepted authority for designating peak and trough dates for the business cycle, the months in which the economy has reached its cyclical highs and lows.
Technically, the bureau designates the period between the high month and the low month as one of contraction, the period between the low month and the high month as expansion.
This nomenclature has Mr. Speakes in trouble immediately. For his ''recovery'' is the early months of the bureau's ''expansion.''
What, then, is Mr. Speakes' expansion?
Not too illogically, he looks at third-quarter GNP as representing the end of a recovery back to the previous 1981 high. In other words, the economy, having recovered to its 1981 high, is now ready to move above that high to ''expand.''
But something has been forgotten.
All the time the economy was falling below its 1981 high, the economy was losing production. That's obvious.
But now, think about the period of recovery back to the 1981 high for a minute. All the time the economy was moving back up, it was still below the '81 high. In other words, just as much economic production was lost during the comeback as was lost during the fall.
At the time of regaining the 1981 high, then, nothing had been recovered at all. The entire period of moving down and moving up was a period in which economic activity fell below the 1981 high and represented lost production.
A ''real'' recovery might better be considered one in which all that lost activity was made up. Such a recovery would require that the economy stay above the '81 high for a considerable length of time. After that, one might begin to speak of a Speakes' expansion.
Defining expansion in terms of the economy's resuming its long-term growth trend is probably closer to the popular understanding of expansion. But to explain that is not easy.
An economy's long-term growth trend is a trend that underlies its major ups and downs. On a chart we draw a straight line roughly connecting the GNP highs in 1969, 1973, and early 1980. We draw another roughly straight line joining the 1970, 1975, and 1980 lows. The growth trend during that period would be a line halfway between the high and low lines.
Now extend that line out for 1981 through '85. For the economy to resume that long-term growth, it would be necessary for GNP to create an area on the chart above that line equal to the area below the line.
Using this criterion, we find third-quarter 1983 GNP remains far removed from what is necessary to resume expansion in the sense of a resumption of the long-term growth that prevailed between 1969 and 1980.
If GNP were to continue upward at its rate during the first three quarters of '83, it would be late 1984 or early '85 before we could speak of the economy's 1969-80 upward growth being resumed.
Whatever the pronouncement regarding next quarter's GNP increase or those that follow in succeeding quarters, remember that the economy has a long way to go before it makes up for its lethargy during 1980-82.