Even the most pessimistic analysts had predicted that second-quarter growth in gross domestic product would show a strong rebound over the dismal results of the first quarter. All but the most optimistic missed just how strong it would be. According to the Commerce Department's Bureau of Economic Analysis Wednesday, annualized growth in seasonally adjusted real (that is, inflation-adjusted) GDP
rose 4 percent during April-June. The consensus of analysts surveyed by Bloomberg had estimated 3.1 percent growth earlier this week.
For the fourth time this year, the bureau estimated the growth of real GDP for the first quarter. Last month, it had revised its two previous estimates to a stunning minus 2.93 percent, one of the sharpest contractions outside a recession since World War II. The newest first-quarter estimate, part of the BEA's regular comprehensive revisions, came in at 2.1 percent. Overall, real GDP growth for the first half of 2014 is now estimated at 1 percent.
The department always provides three estimates of each quarter. The first is always a much rougher estimate than the two which follow for a simple reason: Better data are available about each quarter as the months go by.
Many economists and other analysts had viewed the GDP calculations for the first quarter with suspicion. One key factor dragging down the numbers was the considerably lower spending on health care. Expectations had been that health care spending would rise in the first quarter. But BEA analysts found that it had fallen. In the second quarter, it rose slightly.
The bureau's revisions for the past three years showed that real GDP growth was 0.2 percent lower for 2011 and 0.5 percent lower in 2012 than previously calculated. Growth was revised up 0.3 percent for 2013. This confirms what was already known about the recovery from the Great Recession: It's been weak. One key component of this weakness can be found in the sickly growth in wages that have barely kept pace with low inflation. There has also been a continuing high rate of unemployment, particularly long-term unemployment.
Although the employment situation is far from what can be called healthy, the government has now reported five consecutive months in which newly created jobs topped 200,000 (averaging 248,000). It's predicted that when Friday's Bureau of Labor Statistics report is announced, another such month will be added to the positive trend. The improvement is the best in 15 years. It's therefore no surprise that consumer confidence is at a seven-year high.
There is more to read on this subject below the fold.
For the second quarter of 2014, the BEA said personal consumption rose at 2.5 percent compared with 1.2 percent in the first quarter. Private inventories added 1.66 percentage points to the quarter's growth, repeating the strong impact it has recently had on GDP. First a build-up in the last half of 2013, followed by the contraction in the first quarter of 1 percent, followed in the second quarter with a 2.3 percent rise.
Business purchases increased 5.5 percent in the second quarter after falling in the first, and residential fixed investment rose at a 7.5 percent rate compared with declines in the the fourth quarter of 2013 and first quarter of 2014. Trade still dragged the growth in GDP down, but not so much as in the first quarter. Exports rose 9.5 percent but imports (which subtract from GDP) rose 11.7 percent. Dionne Searcey reported:
“The really ugly G.D.P. report for the first quarter was likely the result of mostly one-off events,” Bob Baur, chief global economist for Principal Global Investors, wrote in a note to clients before Wednesday’s release.
Mr. Baur said industrial output was rebounding and jobless claims were near lows, adjusted for work-force size, both of which were propelling second-quarter growth. [...]
Douglas Handler, chief United States economist for IHS Global Insight Analysis, said one-time events like bad weather and health care spending were not only a drag on the economy, but also that they would have lasting effects. “If you go to a restaurant every week and couldn’t this year because of the snow, you’re not going to now go out twice a week or order two dinners,” he said. “That G.D.P. will be permanently lost.”
The numbers are clearly rosier than they have been. But, as if it weren't already obvious, economic predictions are precarious things. Even though many economic factors—including low levels of new applications for unemployment compensation—seem to indicate that better times are ahead, this isn't the first time we've seen a quarterly gain of 4 percent in GDP growth since the recession officially ended five years ago, only to see it fall in subsequent quarters.
For example, there is the personal spending that is the locomotive for two-thirds of the economy:
[T]he pace of retail sales gains slowed each month since a very strong March. “It’s hard to suggest that consumers are in a healthy place when we’re not seeing wage growth and most of the recent job growth has come in low-wage fields and part-time and temporary positions,” said Lindsey Piegza, chief economist at Sterne, Agee & Leach Inc. She forecasts GDP to advance at just a 2% pace for the quarter.
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Because of flaws in the way it measures economic activity, it is important to use the GDP in conjunction with other economic factors when measuring the economy's health. Robert F. Kennedy's assessment in 1968 is not obsolete:
"Too much and for too long, we seemed to have surrendered personal excellence and community values in the mere accumulation of material things. Our Gross National Product, now, is over $800 billion dollars a year, but that Gross National Product - if we judge the United States of America by that—that Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children. Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile. And it can tell us everything about America except why we are proud that we are Americans."
Inadequacies in the GDP gauge have spurred efforts to develop a better measure or supplements to it. These include France's
Commission on the Measurement of Economic Performance and Social Progress, Canada's
Genuine Progress Index (a version of which has recently been tried out in Maryland), the
Human Development Index and the
Gini coefficient.