Which Sectors Are Responsible For The Output Gap In US?

The output gap in the US is around $800 billion.  That is the amount by which spending is below potential spending in a full employment economy.  Some sectors of the economy are performing better than might be expected, but the increased spending in these sectors does not compensate for the shortfall in other sectors.  This article compares spending in each of sector of the economy with the average spending in each sector between 1993 and 2013.  This identifies the sectors that are primarily responsible for the output gap.

Spending on new residential housing is a major contributor to the output.  That is not surprising given the bursting of the real estate bubble.  The Fed has been keeping interest rates low but low interest rates are not a sufficient stimulus in our current environment.  Underwater households are unable to participate in the market.  They can't afford to sell their home and purchase a new home because they have negative equity in their existing home.  This is unfortunate because historically the Fed has been able to use monetary policy as tool to stimulate the economy during a recession and to slow the economy down when inflation is the problem.

The government sector, including federal spending along with state and local spending, is responsible for the major portion of the output gap.  Government spending is $307.7 below its historical rate.  The government sector and residential housing account for $547.1 billion of the output gap.  It will take time for the residential housing market to return to normal, but the decline in government spending is the result of public policy decisions.

Consumer spending durable products is also well below its historical average but consumers typically avoid spending on big ticket items like automobiles when they are concerned about job security.  Spending on major households appliances also declines in relation to new housing starts. Business investment is also well below average but business investment tends to respond to demand signals which they don't see.  They are using their cash to pay out dividends and repurchase their stock.