2nd Quarter GDP Stats Indicate that Growth Is Accelerating

If you follow this blog you may recall that last week I warned readers that the rate of economic growth in the second quarter was likely to be quite low. Based on analyses of the monthly data series that measure macro economic activity in the U..S, the most reliable models were predicting that the growth rate for the total GDP figure sank as low as 0.5% in Q2. Well, I am happy to report that this prediction was too pessimistic.

According to data released this morning by the Bureau of Economic Analysis, inflation adjusted GDP in the U.S. grew at an annualized rate of 1.7% in the second quarter. This was up from the revised growth rate of 1.2% in the first quarter of this year. It should be noted that the BEA adjusted the way it calculates GDP and it revised its data all the way back to 1969. This revision resulted in slower growth in the first quarter than was previously reported.

These figures from the second quarter will be revised two more times in the next two months, so there may still be some changes. But future revisions notwithstanding there were some surprises this quarter. First, the drag on the economy caused by lower government spending was quite low – less than 0.1%. For several months we have been writing that the negative impact of the federal budget sequester on the GDP data would be the most severe in the second quarter. But this was hardly the case. Lower government spending had a far greater negative impact on the GDP data for Q1 of this year and Q4 of last year. This indicates that the sequester will not be as harmful as previously expected.

Nonresidential fixed investment in structures showed the largest increase. This is a volatile category, so it is difficult to discern a trend. But the increase in business investment for both structures and new employees in Q2 was stronger than anticipated. Net exports (real exports minus real imports) were the biggest drag on the GDP data this time around. Sluggish export growth continues to hamper the U.S. manufacturing sector.

Consumer spending decelerated when compared with Q1. And this is perhaps the biggest problem with the American economy--there is insufficient final demand to drive more robust economic growth. The good news is that the improvement in the monthly employment data and also in the data on home prices suggests that consumer spending will gradually rise in the coming months, so the stage is set for accelerating GDP growth in the coming quarters. As always, we will continue to monitor these data and report on it as needed.