On Friday, the Bureau of Economic Analysis (BEA) reports that the annual rate of growth for real gross domestic product (GDP) — the market value of all final goods produced and services rendered in the United States — was by a tepid 1.5% in the second quarter of 2012 to $13.6 trillion. This growth rate was slower than the revised 2% rate in the first quarter. Moreover, the BEA's revisions of economic data since the first quarter of 2009 signal that the Great Recession was not as weak (declining 4.7% instead of the previous estimate of 5.7%).
The revisions also provide evidence that the pace of economic growth during the expansion has been the second slowest since World War II (5.8% since the second quarter of 2009 compared with 4.4% during the four-quarter expansion in the early 1980s). However, the annual growth rate of 4.4% during the 1980-1981 brief expansion compared with the current expansion's annual growth rate of 2% indicates this expansion has been dismal. Economic output around 3% is necessary for the creation of private sectors jobs to employ those that are entering the labor force and higher than this is needed to provide jobs for the 12.7 million unemployed and lower the 8.2% unemployment rate.
Since about two-thirds of economic output is from consumption and retail sales make up a large part of consumption, the decline in retail sales from April through June indicated weak economic growth in the second quarter. In fact, after consumption increased by 2.4% in the first quarter, it grew by only 1.5% in the most recent quarter. Although the price of gasoline was lower in the quarter, consumers were cautious about spending. Fewer dollars spent led to an increase in the personal savings rate from 3.6% to 4% in the first to second quarter.
In addition to this lower rate of consumer spending, government spending declines at all levels and an increase in imports contributed to slower economic growth in the second quarter. However, the pace of lower government spending fell, and from the spending calculation of GDP, which a recent PolicyMic article argues does not measure economic output correctly, there are indications that government spending could be a plus to economic growth in the near future.
After years of being an economic drag on the economy, fixed investments were substantially positive the last two quarters. In particular, nonresidential and residential fixed investment increased by 5.3% and 9.7%, respectively. These are good long-run signals for economic growth and an indication that the housing market continues to heal.
Private inventories is the most volatile component of GDP and can send a mixed signal about the state of the economy. Specifically, if inventories increase, this could be because there are fewer goods on stores' shelves from increased demand or because firms are catching up from too little investment during the previous period. Therefore, the growth rate of inventories tends to be quite erratic. Considering that inventories grew last quarter, another measure of the economy that does not include private inventories and is important for understanding the state of the economy is the real final sales of domestic product. This measure increased by only 1.2% in the second quarter, signaling weaker growth than the popularly reported real gross domestic product.
Despite this anemic economic growth rate, the stock market cheered today's report because this growth rate matched or exceeded investors' expectations. This slow rate of economic growth and constrained annual inflation rate for the core personal consumption expenditures — excludes food and energy — of 1.8% provide some analysts to suspect that the Federal Reserve will attempt to stimulate the economy with additional monetary policy tools when the Fed's policymaking committee meets next week.
To summarize, this economic report supports what we already know — the economy remains weak. Numerous headwinds on the horizon from the fiscal cliff at the end of year, higher petroleum and food prices, and weakness in Europe will contribute to lower expectations of future economic growth.
Although the recession was not as severe as we once thought because of additional government spending, this "stimulus" cannot last and the distortions it creates in the production process leads to mal-investments that will take time to correct. Throwing more money from Congress or the Fed will not allow these adjustments to occur in the economy and we will have a slower recovery, deeper recession in the near future, and lower prosperity for Americans. The failures of these policies in the past are another indication that we need a drastically different approach to restore economic prosperity in America.
What policies do you think we should take? Has the government spent too little and the Fed not purchased enough assets? Should we lower government spending, cut taxes, and reduce regulations? These debates should occur during this presidential election year. Little else matters if millions of people are unemployed, the government nears bankruptcy, and private firms remain uncertain about the future.