July 27, 2012 (GDP Byte)


By Dean Baker

Weak growth was largely a payback from strong growth in the winter.

A slower rate of consumption growth was the most important factor reducing the second quarter growth rate to 1.5 percent from the 2.0 percent rate reported for the first quarter. (The first-quarter number had previously been reported as 1.9 percent.) A slowdown in car sales was in turn behind the slowdown in the rate of consumption growth from 2.4 percent in the first quarter to 1.5 percent in the second quarter. Car sales had added 0.85 percentage points to growth in the first quarter; they subtracted 0.06 percentage points from growth in the second quarter.

There was little change from recent patterns in most other components of GDP. Non-residential fixed investment increased at a 5.3 percent annual rate, down from 7.5 percent in the first quarter and its weakest showing since it actually declined in the first quarter of 2011. The slowdown was due to weakness in structure investment, which grew at just a 0.9 percent annual rate.

This is likely explained by the weather effect. With many construction projects started or continuing through an unusually mild winter, there would have been less of an increase in the spring than would ordinarily be the case. With this weather effect behind us, it is likely that the third quarter will show stronger growth. It is also worth noting that previous construction data had been revised sharply upward, so it is possible that will prove to be the case with the second-quarter number as well.

Investment in equipment and software edged up slightly to a 7.2 percent annual rate from a 5.4 percent rate in the first quarter. This uptick is positive, but in a context where consumption growth is weak and the government sector is shrinking, it is not providing much of a positive boost to the economy. In total, non-residential investment added 0.54 percentage points to growth in the quarter.

In spite of the weather effect, housing had another strong quarter, growing at a 9.7 percent rate in the second quarter after a 20.5 percent growth rate in the first quarter. Residential investment remains badly depressed, accounting for less than 2.5 percent of GDP. This compares to a pre-housing bubble average of close to 3.5 percent. It is likely that housing will continue to grow over the next year, providing a modest boost to output.

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The government sector was once again a drag on growth, shrinking at a 1.4 percent annual rate and subtracting 0.28 percentage points from growth for the quarter. The biggest factor in this decline was a 2.1 percent decline in state and local spending. As state and local governments have already completed most of the austerity needed to balance their budgets, the drag from this sector is likely to be less in future quarters.

Trade was a net negative, subtracting 0.31 percentage points from growth, as 6.0 percent increase in imports more than outweighed a 5.3 rise in exports. This picture is unlikely to improve much in the near future with much of the rest of the world experiencing either recessions or weak growth.

The annual revisions with the second-quarter data included few major surprises. The first and second quarters of 2009 were revised upward to show a somewhat less steep recession; however, this was more than offset by downward revisions to growth in 2010. Growth for 2011 was revised upward, with the fourth quarter now showing a 4.0 percent growth rate.

Corporate profits were revised down for all three years. The revision lowered profits by 2.3 percent in 2011, making the shift from wages to profits over this business cycle somewhat less dramatic.

There is little in this report that provides much hope for a substantial acceleration in growth. Consumption is likely to return to a 2.0-3.0 percent growth rate. Recent data on durable goods orders indicate that equipment investment may be slowing, even if structure investment is still strong. Housing is also likely to continue to grow at near double-digit rates. However, with the government sector contracting and net exports likely providing little positive boost to the economy, it is difficult to see how growth can get much above its 2.5 percent trend rate.  


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