Excluding housing, the U.S. economy is doing just fine.
That’s the latest rationalization of a select group of operators who think that the Bush administration’s 4.6 percentage point cut in the top marginal tax rate and 5-point reduction in the top capital gains rate can protect the economy from any and all ills.
To say that ex-housing the economy is doing just fine is tantamount to claiming that, ex-Iraq, Bush’s Middle-East policy is a rousing success.
How valid is the claim that outside of housing everything is hunky dory? Let’s go to the videotape to see how housing- centric the U.S. economy’s weakness really is.
The Commerce Department reported Friday that real gross domestic product rose 1.3 percent in the first quarter, the slowest pace in four years. The year-over-year growth rate slipped to 2.1 percent, also a four-year low.
Investment in housing, the purported culprit, fell 17 percent, less than in the fourth quarter. Residential investment, as it’s known in the GDP accounts, subtracted from growth for the sixth consecutive quarter, something that hasn’t happened since 1980.
The first quarter’s sluggish growth wasn’t confined to housing, however. Exports declined, inventories were a small drag, and capital spending (investment in equipment and software) rebounded 1.9 percent — better than expected based on monthly data on shipments but nothing to write home about after declines in the second and fourth quarters of last year.
“The initial weakness was in housing, but the weakness in capital spending is not a cross-infection from housing,” says Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.
One year ago, capital spending was growing at a 9 percent year-over-year rate, he points out. Now it’s zero.
“A year ago, people said capital spending was going to rescue us as housing slowed,” he says. “Capital spending is down to zero (year-on-year). There’s been an unambiguous slowdown.”