The Commerce Department announced this morning that economic expansion in the second quarter of 2010 was worse than the expert consensus had estimated. It clocked in at a paltry 2.4 percent in seasonally adjusted annualized growth of gross domestic product, the value of all goods and services produced. This reflects a growing trade deficit and reduced consumer spending. Today’s second-quarter numbers will be revised twice in the next two months as more complete data become available.
In addition to the second-quarter report, the department’s annual revisions of GDP from earlier quarters indicate that the Great Recession has been even deeper than previously thought and the recovery weaker. For instance, the third quarter of 2009 was revised from 2.2 percent growth to 1.6 percent, and the fourth quarter of 2009 - which has shown the largest growth since the recession began in 2007 - was revised from 5.6 percent to 5 percent. GDP for the first quarter of 2010 was modified from 2.7 percent to 3.7 percent, the only upward revision.
The revisions help explain why the U.S. economy has lost so many more jobs than economists would have predicted given the magnitude of the previously reported drop in GDP; that is, the previously reported drop in GDP was misleading.
Although the U.S. economy has now seen four consecutive quarters of growth, the drop in the rate of that growth since the fourth-quarter of 2009 is anything but encouraging for rank-and-file Americans.
The best news in the Commerce report was that business spending on equipment and software increased by 21.9 percent in the second quarter, with overall business investment up 28 percent. But real personal consumption expenditures increased only 1.6 percent in the second quarter, compared with an increase of 1.9 percent in the first. Those numbers were reflected in this morning's University of Michigan report that consumer confidence has fallen to a nine-month low.
As a gauge of economic performance, much less of economic well-being, gross domestic product leaves a good deal to be desired. Efforts to replace it, however, including that commissioned by French President Nicolas Sarkozy, with Joseph Stiglitz in charge, have yet to succeed. But GDP is only one gauge, to be considered alongside others.
Nine months ago it wasn’t hard to find predictions from Barron’s or Goldman-Sachs that annualized GDP growth for the second quarter would top 5 percent and maybe even reach 6 percent. Three months ago, many prognosticators were still estimating growth at 4 percent. By early July, most experts had dropped their predictions to around 3 percent.
The weak report is no surprise, but neither is it a yawn. A heavy load of mostly disappointing economic data - in manufacturing, retail consumption spending, unemployment, housing foreclosures, truck and rail traffic, exports vs. imports and consumer sentiment, combined with more recent reports of sluggishness from the Fed and its branch banks – had already greatly lowered the optimistic expectations from earlier in the year. Talk of a “V”-shaped recovery - the “rubberband” effect so widely touted as late as April - has become subdued.
Just yesterday, Dallas Federal Reserve President Richard Fisher offered the latest version of the downbeat view when he said economic growth would continue a “slow slog” of improvement but remain below 3 percent for a “prolonged period.” Overall, he said, “I fear the nation’s economy will be sailing forward at suboptimal speed, despite the fact that the cost of borrowing is low, equity markets have shown resilience and liquidity is plentiful on corporate balance sheets and in the form of excess reserves in the banking system.”
St. Louis Fed President James Bullard released a white paper the same day evaluating [pdf] the possibility that the United States could follow the path of Japan by falling into a long-running deflationary period.
The quarterly Associated Press Economic Survey found that the majority of 42 economists surveyed don’t think we’re headed for a double-dip recession, but they do see much slower growth into 2011 and do not believe employment will return to the 5 percent level until 2015.
Far less optimistic than they were in January, economists at Goldman-Sachs now say the economy will only grow 1.5 percent in the second half of the year. One of them, Jan Hatzius, says: "Absent substantial further stimulus, we worry that final demand will recover only very slowly given the continuing headwinds on sectors such as housing, consumption and state and local spending."
Prajakta Bhide, a research analyst at Roubini Global Economics, says: “Given how weak the labor market is, how long we’ve been without real growth, the rest of this year is probably still going to feel like a recession. It’s still positive growth — rather than contraction — but it’s going to be very, very protracted.”
The GDP report combined with predictions of a slowdown make the Fed’s downwardly revised outlook that growth for the entire year will range from 3.0-3.2 percent seem overly optimistic. Even if the economy did grow at that level, it would be discouraging. It’s true that GDP growth of 3.3 percent is the average for all quarters since 1947. But that’s too low during the first stages of a recovery to generate enough jobs to put the millions who have lost theirs back to work. Although there are dissenters, under what economists call “Okun’s law” it takes about 3 percent growth just to create enough jobs to keep pace with the population increase.
Millions of Americans are hamstrung by hugely profitable corporations continuing to off-shore jobs and unwilling to invest their hoards of cash in economic activity that requires new domestic hiring, by banks unwilling to lend to small businesses, by small businesses unwilling to seek loans because of lack of consumer demand, by lack of consumer demand because of debt and the lack of jobs.
Harold Meyerson describes the situation in stark terms:
Is this model sustainable? It's hard to say -- a double-dip recession could plunge their profits yet again. But from the American worker's perspective, the [corporate] model, no less than a new downturn, is an unqualified disaster. It portends the kind of long-term, structural unemployment that we haven't seen since the 1930s. It locks into place a generation of reduced incomes.
This dystopian America already stares us in the face. Fully 46 percent of the unemployed have been without work for six months or more -- the highest level since the Bureau of Labor Statistics began measuring such things in 1947. Two years ago, just 18 percent of the unemployed were jobless for more than six months. America's private-sector job machine -- the marvel of the world since 1940 -- has clanged to a halt, and there's no place for it in corporations' new business model. …
Corporations have figured out a way to make money without resuming hiring. Their model is premised on not resuming hiring. If the public sector doesn't fill the gap, the era of American prosperity is history.
Getting the public sector more deeply into the act requires getting Congress to act. And while the majority of the House appears willing to do so, the ever-obstructionist Senate minority stands squarely in the way of anything but the most watered-down economic legislation no matter who gets harmed by its failure.
