This is the 12th consecutive quarter of growth in real GDP. Casting aside all the flaws in GDP as a measuring tool, this is a lousy, although not unexpected report. Once again, the happy-talkers who ridiculed critics that questioned their beginning-of-the-year projections of 3-plus percent GDP growth, are left to make their excuses. The drop confirms what many analysts have been saying since March: Economic growth remains sluggish.
Corporate profits are at record levels, compensation for the magnates of Wall Street are soaring again, trillions of dollars are tucked into off-shore hideaways out of the taxman's reach and hoi oligoi are buying more luxury goods than ever. But growth in the number of jobs for people outside this golden circle of affluence is likely to remain well below what is needed to reduce the vast ranks of the unemployed, millions of them out of work for six months or longer.
Today's is the "advance" measurement of GDP for the quarter. Two short-term revisions will be made in August and September. Longer-term revisions in GDP measurement will also be made, like the tweaks the BEA announced this morning for 2009-2011.
GDP gauges the total reported output of goods and services. As many critics have noted over the years, it fails as a measure of people's well-being. Robert F. Kennedy said it succinctly in 1968: GDP "measures everything, in short, except that which makes life worthwhile." GDP leaves out things such as income inequality, the intensity of poverty, economic security, crime costs, the economic value of civic and voluntary work, the economic value of unpaid housework and child care, educational attainment and life expectancy. It’s a measure that assigns zero value to leisure time, to the depletion of mineral and other natural resources, to the benefits of saving, to trade imbalances, to deficits and debt.
This weakness has sparked numerous efforts to develop a better gauge or at least 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.
Recognizing the limitations of the GDP report, one number worth focusing on in today's release is final domestic sales. This is GDP minus the change in private companies' inventories. In today's report, this came in at 1.2 percent. In the first quarter it was 2.4 percent Household purchases rose 1.8 percent, the same as in the first quarter.
Much of the slowdown in growth in the second quarter was caused by a softening in consumer spending as Americans eased off on automobile purchases due to tepid job and income growth.The price index for personal consumer expenditures in the second quarter, which measures inflation, grew 0.7%. That compares with a 2.5% gain in the first quarter. The core inflation rate, which leaves out food and energy prices because they are so volatile, rose 1.8 percent during the second quarter. The CIF rose 2.2 percent in the first quarter.
Consumer spending, which makes up about 70 percent of U.S. economic activity, increased at a 1.5 percent rate, a step down from the 2.4 percent pace logged in the previous three months.
Consumer spending was the weakest in a year. Much of that reflected a drop in spending on long-lasting goods such as automobiles, which had buoyed consumption in the prior period.
Having been burned by predicting in December 2010 that GDP expansion would be as high as 5 percent for 2011, forecasters had become cautious about their predictions of GDP growth for 2012 by late last year. They began changing their minds early in 2012 until, by April, they had raised their estimates for this year to as high as 2.6 percent. Not exactly blazing, but far better than things have turned out. Changes in the economic picture since the end of March have spurred lowered estimates, so much so that in the week before today's report the consensus estimate had fallen to 1.3 percent.
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The International Monetary Fund has lowered its estimate and now forecasts 2 percent annual growth in GDP for all of 2012. That's the same level at The Wall Street Journal's economic forecasting survey. But these are optimistic assessments in the view of others. Michael Feroli at JP Morgan projects 1.4 percent growth.
“We’re seeing weak numbers pretty much across the board,” said Michael Hanson, a senior U.S. economist at Bank of America Corp. in New York. “Softening consumption is definitely a big part of the slowdown. The uncertainty over Europe and the fiscal cliff will impinge on business decisions and activity.”The slowdown can be seen in other recently released economic statistics:
• Retail sales fell in June for a third consecutive month, the longest period of declines since 2008.
• Gains in new payroll jobs slowed to an average 75,000 in the second quarter, down from 226,000 in the prior three months. That's the weakest since the third quarter of 2010.
• The Commerce Department said on Thursday that durable goods orders (excluding the volatile transportation market) dropped 1.1 percent in June. That's the biggest decline since January.
• While the housing market has showed some signs of improvement in recent months, sales of existing homes fell to an eight-month low in June.
• The Philadelphia Federal Reserve Branch survey for July was negative for the third consecutive month. Two other branches, New York and Cleveland, are showing slower activity.
• Small businesses' confidence in June took its biggest drop in almost two years.
• The Conference Board Index of leading indicators has declined for two of the past three months.
• Most of Europe not already there is sliding into recession.