Why Has America’s Economic Recovery Stalled?

CAMBRIDGE – The United States’ import bill now exceeds $2.4 trillion a year, more than twice that of China and greater than that of the 27 European Union countries combined. Since the volume of US imports varies with the overall strength of the American economy, so does the volume of other countries’ exports.

So it was good news for everyone when the US economy began expanding in the summer of 2009, 19 months after falling into the recession that officially started in December 2007. Unfortunately, the recovery has turned out to be very anemic. Now, 15 months into the expansion, the level of real GDP is still lower than it was when the recession started.

Even more worrying, the rate of GDP growth has been declining almost from the start of the recovery. Real GDP rose by 5% in the fourth quarter of 2009, reflecting the end of the decline in inventories. GDP growth then fell to 3.7% in the first quarter of 2010 and to only 1.7% in the second quarter. The third quarter is shaping up to be much like the second.

This recovery has been much weaker than previous ones because of fundamental differences in the cause of the downturn and in the policies chosen to achieve recovery. Previous downturns were caused by the central bank’s efforts to reverse or prevent inflation by hiking short-term interest rates. When the central bank succeeded, it lowered those rates and the economy bounced back.