The latest read on economic growth in the United States was a clear positive during an economic recovery that’s grossly underperformed since it officially started in mid-2009. We won’t get a read on economic growth for the fourth quarter and all of 2014 until late January. But the most recent take on the third quarter of 2014 pegged annualized real growth at a robust 5 percent. That was the fastest growth seen since the third quarter of 2003.
Third quarter expansion was fed by solid growth in consumer spending, private fixed investment and government consumption and investment. One can — and should — argue a significant chunk of the government measure turns out to be an actual negative for the economy. But the private sector numbers were pretty solid. It also must be noted, though, that private investment and exports both slowed from the second quarter.
So, looking ahead to U.S. economic performance in 2015, we have five key issue to watch:
Can strong economic growth be sustained? Sustainability — or the lack thereof — has been the issue throughout this recovery. A quarter of strong growth here and there has been followed by weak quarters. Indeed, throughout this recovery, real GDP growth has averaged only 2.3 percent, about half of what it should average during a recovery. Various projections estimate fourth quarter growth in the 2.5 percent to 3 percent range, and the same for 2015. That, again, would come in well below how fast the economy should be growing during a recovery. If the U.S. managed to squeeze out 3 percent in 2015, that would be the first year the 3 percent mark would be touched since 2005.
Can private investment finally recover and start truly expanding? When it comes to growth, the critical measure to watch is private investment, which faltered badly during the most recent recession and current recovery. Incredibly, real gross private domestic investment in the third quarter of 2014 was still below the high hit in the first quarter of 2006. That’s a nearly nine-year private investment dearth in the U.S.
Will economic growth in other nations affect the U.S.? Expanded trade has been a big part of U.S. economic growth in recent decades. From 2004 to 2013, for example, real exports accounted for 37 percent of real U.S. GDP growth. Troubling economic news among key trading partners — Europe, Japan and China — warrant concern over U.S. growth in the coming year.
Watch levels of entrepreneurship. Basic indicators of entrepreneurship — namely, unincorporated and incorporated self-employed — have performed poorly since the 2006-2008 period. For example, unincorporated self-employed (seasonally adjusted) declined in November (latest data, at this point) compared to October, experienced no significant growth since February and is down markedly since the high set in December 2006 (10.68 million in December 2006 versus 9.55 million in November 2014). This, arguably, has been the worst performance since the early 1970s.
Watch federal policymaking. The largest impediment to economic growth over the past eight years has been misguided and costly public policies at the federal level. Higher taxes, increased regulation, federal spending claiming a larger chunk of the economy, an absence of leadership on reducing barriers to global trade and opportunity and uncharted territory in terms of loose monetary policy add up to historic obstacles to economic growth. What growth has occurred is a tribute to the resilience of U.S. entrepreneurs, businesses, investors and workers. If policy makes a shift in 2015 — undertaking real tax reform, regulatory restraint across federal agencies, fixing the excesses of Obamacare and Dodd-Frank along with broader reforms and significant action on major trade deals — pro-small business policies such as these will be good news for growth.