The majority of Americans can be forgiven for believing -- as they do -- that the U.S. economy is still in a recession when it’s not. The economy is certainly growing, which is the definition of not being in a recession. But growth has been painfully slow this year, running at just about a two percent annual rate. No one would call that good performance. It is, in fact, little better than half the growth rate that many forecasters expected when the year began. Reflecting this weakness, forecasts for both 2011 and 2012 are being revised downward.
Think of the U.S. economy as an airplane flying on three engines. The main growth engine is always the private sector, with monetary and fiscal policy, the two smaller engines, giving the aircraft a boost now and then. In normal times -- which these are not -- the private sector provides more than enough forward thrust. So the two supporting engines, monetary and fiscal policy, are not needed. Indeed, there are times when the private sector generates so much power that the other two engines must be fired in reverse to hold the airplane back. (My metaphor is breaking down here. Licensed pilots, please forgive me.)
But the present is one of those times when the main engine is faltering a bit. It hasn’t gone dead. The economy is still flying well above the clouds, not nose-diving the way it did in the winter of 2008–9. But the normally powerful private sector is not generating much forward momentum right now. It could use a little help from the supporting monetary and fiscal engines, but it doesn’t look likely to get any. In fact, they are more likely to do harm. That is what is so worrying.
Why has growth slowed down so much? There is not one crisp answer; rather, it seems to be a combination of factors. Higher oil prices have taken a toll, although they seem to be receding of