July 31, 2014
The Washington Post went a bit overboard with its lead article reporting on the second quarter GDP data. The article begins:
“After suffering the sharpest contraction since the recession ended, the U.S. economy rebounded this spring, providing fresh evidence that the recovery is finally turning a corner.
“Government data released Wednesday shows the economy expanded at an annual rate of 4 percent during the second quarter. Consumers pulled out their wallets, businesses restocked their inventories and even the long-moribund housing market perked up.
“The strong report dovetails with recent improvements in the job market. The Labor Department is expected to announce Friday that more than 200,000 net new jobs were created in July, marking the sixth straight month it has hit that benchmark.”
Actually the 4.0 growth figure reported for the second quarter implies the economy is on a very slow growth path when averaged in with the -2.1 growth in the first quarter. Taken together, the economy grew at less than a 1.0 percent annual rate in the first half of 2014. That is hardly cause for celebration.
And it is important to understand that the strong growth in the second quarter was directly related to the weak growth in the first quarter. Inventory growth was very weak in the first quarter, subtracting 1.16 percentage points from the quarter’s growth. This meant that the return to a more normal pace of inventory accumulation in the second quarter was a strong boost to growth, adding 1.66 percentage points. Final sales grew at just a 2.3 percent annual rate in the second quarter.
Even that rate was likely inflated to some extent by the weakness from the first quarter. In particular, a sharp jump in car sales added 0.42 percentage points to growth for the quarter. That will not be repeated in future quarters.
The report, taken together with the first quarter numbers, implies an underlying rate of growth close to 2.0 percent, the same as the rate for 2011-2013. This pace is at best keeping even with the economy’s potential growth rate, meaning that it is making up none of the ground lost during the recession. According to the Congressional Budget Office’s estimates, the economy is still operating at a level of output that is almost $800 billion (@4.5 percent) less than potential GDP. It will not close this gap unless it grows more rapidly than its potential.
The comment about job growth being in line with GDP growth seems misplaced given that the economy added 190,000 jobs a month in the first quarter when the data showed the economy shrinking by 2.1 percent. The pace of job growth has been quite extraordinary given the weakness of the economy.
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