According to today’s report from the Bureau of Economic Analysis, gross domestic product (GDP) —the broadest measure of economic activity—grew at an annualized rate of 1.3% in the second quarter of 2011. Furthermore, this quarter’s report contained revisions to past GDP data, the most striking of which was that GDP in the first quarter of 2011 grew at just a 0.4% annualized rate. This means that the last six months have seen an average growth rate of less than 1%, a rate of growth that fully explains why the previously declining unemployment rate reversed course in the past six months.
There is nothing in today’s report to suggest that growth is imminent. Final demand—a measure of output growth that strips out the influence of inventory investment (a particularly volatile component of GDP whose movements are quite hard to interpret quarter-to-quarter)—rose at only a 1.1% annualized rate in the second quarter, after being flat in the first quarter. Domestic demand growth—a measure of final demand stemming from U.S. residents—also rose very slowly, growing at a 0.5% annualized rate, essentially matching the previous quarter’s 0.4% growth.
Growth in personal consumption expenditures—the single largest component of GDP—decelerated to a 0.1% annualized growth rate from the previous quarter’s 2.1% rate.
Business investment in equipment and software has also begun slowing, growing at a 5.7% rate in the second quarter, after 8.7% growth in the first quarter. This type of investment has been growing consistently quickly since the recession ended, averaging 13.4% annualized growth between the third quarter of 2009 and the first quarter of 2011.
Other components of investment improved on previously weak performance. Business investment in structures rose at an 8.1% rate in the second quarter, after a 14.3% decline in the first. Residential investment rose at a 3.8% rate after falling by 2.4% in the previous quarter. However, it is far from clear that the overbuilding associated with price bubbles in both residential and commercial real estate have yet to be resolved—neither type of investment has seen consistent (i.e., lasting a full year) growth even since the recession officially ended.
Net exports provided a boost to growth in the second quarter, adding 0.6 percentage points to the overall growth rate. However, between clear decelerations in growth in many major U.S. trading partners and the fact that net exports have been on a downward trend since the official recovery began, this sector will likely not be an engine for growth unless policymakers find a way to allow the dollar to fall to a more competitive level.
Federal government spending added 0.2 percentage points to the growth rate in the second quarter, after a decline in the first. All of this increase (and more) was accounted for by rising defense spending, while non-defense spending fell. State and local government spending cutbacks subtracted 0.4 percentage points off of the quarter’s growth rate, matching its drag during the first quarter. This represents the seventh quarterly decline in this sector in the last eight quarters. Given that the fiscal crisis facing the states will persist for some time and that the re-orientation of political debate at the federal level is moving toward rapid fiscal consolidation, it is unlikely that these sectors will do anything but drag on growth in the near-term.
The personal savings rate rose slightly to 5.1%, up from 4.9% in the previous quarter. This level for the first half of 2011 is actually slightly down from the 2010 average of 5.3%. In short, it is hard to pin the anemic growth in 2011 on a reluctance of American households to spend. While savings rates were significantly lower during the twin stock and housing bubbles of the late 1990s and 2000s, historically this rate has reached much higher levels than 6% for extended periods. In short, savings rates do not seem poised to return to bubble-era lows, and history suggests they may still rise in coming years. Given this, sustaining consumption growth going forward will depend to a large degree on robust growth in wage and salary incomes. However, aggregate inflation-adjusted wage and salary income (deflated by the personal consumption expenditures price index) rose only at a 1% rate in the second quarter.
Another clear sign that the economy is running below potential simply because of weak demand (that is, insufficient spending by households, businesses, and governments) is the continuing slow growth of “core” prices—prices minus food and energy products, whose changes are both volatile and driven largely by supply-side influences in the short-run. The “market-based” deflator for core personal consumption expenditures (a closely watched indicator of inflationary pressures building up in the economy) rose by only 1.3% between the second quarters of 2010 and 2011.
All of the signs in this report point to an economy that remains below potential because it lacks sufficient spending. Furthermore, the revisions make clear that this dearth of spending has actually driven the economy further away from its potential levels than we had previously thought. The first six months of 2011 saw the too-slow but relatively steady progress since late 2009 in lowering the unemployment rate stop and then actually reverse.
After hitting a low of 8.8% earlier in 2011, the unemployment rate in June reached 9.2%. Today’s GDP report explains why: because of the lack of spending, growth has markedly decelerated in 2011. While the economy is not in recession, a growth rate of 0.9% (the average for the first half of 2011), if sustained for the entire year, would result in an unemployment rate rising by almost a full percentage point over that time, all else equal.
Lastly, the revisions to past GDP data actually reveal that the Great Recession was worse than previously thought—GDP contracted at an annualized rate of 3.5% in quarters during the recession, worse than the previously reported 2.8% rate. And the recovery has been slightly worse as well—the economy has been growing at an average annualized rate of 2.6%, not the previously reported 2.8%, since the expansion began.
