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Economy Bounces Back From The Polar Vortex Slowdown

Economy Heartbeat

The first three months of 2014 were notable mostly for the cold, snowy weather that gripped much of the nation for an extended period of time, but they also marked one of the worst periods for the economy in some time. By the time the final estimate came out last month, the Commerce Department was reporting that Gross Domestic Product had shrunk nearly 3% in the first three months of the year. At the time, most analysts attributed the decline to the fact that the weather had slowed economic growth across the board, and the general consensus was that the Second Quarter would see a rebound from the downturn. As I noted at that time, there were signs in other economic data that tended to point in both directions on that point. Today, though, we got the first estimate of 2nd Quarter GDP and, at least for now, things look to be pretty good:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 4.0 percent in the second quarter of 2014, according to the “advance” estimate released by the Bureau of Economic Analysis. In the first quarter,  real GDP decreased 2.1 percent (revised).

The Bureau emphasized that the second-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 3 and “Comparisons of Revisions to GDP” on page 10). The “second” estimate for the second quarter, based on more complete data, will be released on August 28, 2014.

The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

Real GDP increased 4.0 percent in the second quarter, after decreasing 2.1 percent in the first. This upturn in the percent change in real GDP primarily reflected upturns in private inventory  investment and in exports, an acceleration in PCE, an upturn in state and local government spending, an acceleration in nonresidential fixed investment, and an upturn in residential fixed investment that were partly offset by an acceleration in imports.

This is clearly a good number, and a welcome comeback from the downturn of the first three months of the year. However, it’s unclear how much of what we’re seeing here is a reflection of the actual state of the economy in the period between April and June and how much of it is a result of pent-up economic activity that was inactive during the first three months of the year due weather conditions. For example, exports jumped significantly between the first and second quarters, but much of that was likely due to the fact that shipping was significantly disrupted during the winter, especially in the Upper Midwest and the Northeast. If you look deeper into the numbers, you see that there aren’t a lot of differences between the numbers between the two quarters in the areas where you’d expect to see big differences if there was a real economic boom, most specifically in personal expenditures, which increased 2.5% in the second quarter after having also increased by 1.2% in the previous quarter. In other areas, growth was actually slower than it had been in the previous three months of the year. The service sector, for example, grew at .7% according to this report after having grown at 1.3% in the first quarter. To some extent, then, the numbers we’re seeing, assuming that they even hold up after the coming revisions in August and September, probably aren’t as good as they look on paper.

The New York Times’ Neil Irwin notes some other caveats about today’s report:

Of the 4 percent reported growth, 1.66 percentage points was attributable to businesses increasing their inventories. But when companies make more goods that end up on store shelves or in warehouses (and not because they’re selling more stuff), that doesn’t tell us much about the future of the economy. So economists often look at “final sales,” excluding inventory effects, to get a sense of the true underlying pace of growth.

It shows a much less volatile pattern over the last few quarters. By that measure, the first quarter was not quite so gloomy (with the economy shrinking at only a -0.9 percent rate) and the second quarter not nearly so sunny (that big 4 percent growth headline gets cut down to size, to 2.3 percent).

So inventories are a major part of the second-quarter story. But where else is the growth in G.D.P. coming from? For that, take a look at what different sectors contributed to overall growth.

Aside from inventories, the other major driver of expansion in the spring was from personal consumption expenditures. This accounts for around two-thirds of the economy, so it unsurprisingly accounted for the majority of economic growth.

Within personal consumption, the growth was broad, coming both from durable goods (like cars), nondurable goods (like clothing) and services (like health care). Meanwhile, business investment and housing investment were both positive but modest, and trade was a net subtracter from growth, as imports rose faster than exports. Government kicked in a small contribution to growth, as expansion in state and local spending made up for a contraction in federal spending.

By this measure, the expansion of the last few years looks a great deal more steady. The nation’s economic output has expanded by around 2 percent a year, with a high of 3.1 percent in the year that ended in the fourth quarter of 2013 and a low of 1.2 percent in the year that ended in the third quarter of 2011. The latest reading on the spring of this year is squarely within that range, with the expansion clocking in at 2.4 percent over the last 12 months.

That growth rate would be just fine in normal times, when the economy is humming along with full employment. But it’s disappointing given that the economy still appears to be functioning below its potential, with unemployment high and businesses still not producing at full capacity.

None of this is to dismiss the fact that today’s number is better than what we saw in the first quarter. Hopefully, it will hold up through the revision to come and into the third quarter. We’ll get at least some indication of that on Friday when the July Jobs Report is released. If previous months are any indication, we should see a solid net jobs number well above 200,000. It’s worth noting, though, that this month’s ADP number, which was released today, came in below estimates. As I’ve noted before, the correlation between the ADP report and the Labor Department’s can be hit and miss at times, however they do generally tend to follow the same trend lines.  For the most part, though, the best we can say is that things look like they were better in the second quarter than they were in the first, but not so great that we can count on the fact that we’ve entered into a new era of much higher economic growth.

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About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May, 2010 and also writes at Below The Beltway. Follow Doug on Twitter | Facebook

Comments

  1. Mu says:

    I have to stop reading Hot Air, I could have sworn the first quarter slowdown was all Obama’s fault and the second quarter turn-around was due to the enthusiasm about the coming republican take-over under Santorum/Cruz.

    Highly-rated. Helpful or Unhelpful: Thumb up 20 Thumb down 1

  2. stonetools says:

    Seems like the Republicans are plumb out of ways to sabotage the recovery. I foresee continuing strenghthening of the economy and a fall in unemployment, which means that the economy will be working in favor of the Democrats in the runup to the 2014 elections. I foresee more good Obamacare news too, but even without that, the Presidential’s approval numbers are going to rise, and so will the Democrats’ chances of holding the Senate.

    Like or Dislike: Thumb up 8 Thumb down 3

  3. Rob in CT says:

    Average out the revised Q1 and new Q2 (which will be revised at some point, obviously) numbers and you get right back to our steady muddling-through we’ve been doing for years now.

    It’s not great, and it’s not terrible.

    Maybe, just maybe, fewer people should react excitedly to the release of these quarterly numbers, unless we’re clearly in free fall (ala late ’08/early ’09). The data is noisy as hell and GDP is basically a quick ‘n dirty single-number factor people use to gauge a much more complex thing (the overall health of our economy).

    Like or Dislike: Thumb up 9 Thumb down 0

  4. gVOR08 says:

    @stonetools: Yup. You can’t keep a good economy down. Although gawd knows they’ve tried.

    Like or Dislike: Thumb up 8 Thumb down 2

  5. anjin-san says:

    And I was so sure Q1 was the result of the Obama Doom…

    Like or Dislike: Thumb up 4 Thumb down 2

  6. Tillman says:

    This is one of my dumber moments, but does it bother anyone else that fiscal years don’t line up with GDP years?

    Like or Dislike: Thumb up 0 Thumb down 0

  7. al-Ameda says:

    Since the Great Recession of 2008-09 (when we experienced a period when the loss of jobs was over 700,000 per month), the economy has experienced slow steady growth for four and a half years, and unemployment has slowly declined from over 10% to 6.3% the lowest level in 6 years. Have there been bumps along the way? Of course. Has there been constant political opposition to the economic growth initiative of the Administration? Yes.

    The fact is, despite 4 years of unwavering political opposition and obstruction, including 2 attempts to shut down the federal government, the economy has been on a path of unspectacular growth for over 50 months. Considering that the crash caused the loss of $18 Trillion in the wealth of Americans and their businesses I’d say that that’s no mean feat.

    Like or Dislike: Thumb up 9 Thumb down 1

  8. Davebo says:

    if only the GDP numbers reflected the numbers for the markets in general this would be considered boom times.

    Well, it is boom times. For some.

    Like or Dislike: Thumb up 3 Thumb down 0

  9. michael reynolds says:

    @al-Ameda:

    Very well put.

    The GDP is above what it was when Mr. Bush handed off the bloody shards of the economy, unemployment is back to where it was, though of course we’d all like to see better, the deficit is trending down and Obamacare is working. All despite Republican sabotage.

    Once again Democrats have saved the country with no help whatsoever from the disloyal opposition.

    Like or Dislike: Thumb up 12 Thumb down 0

  10. OzarkHillbilly says:

    I blame Obama.

    Wait a minute……

    Like or Dislike: Thumb up 9 Thumb down 0

  11. OzarkHillbilly says:

    @al-Ameda: That’s not what Boehner and Mitchell will say:

    “The fact is, despite because of 4 years of unwavering political opposition and obstruction, including 2 attempts to shut down the federal government, the economy has been on a path of unspectacular growth for over 50 months.”

    Like or Dislike: Thumb up 6 Thumb down 0

  12. SenyorDave says:

    @michael reynolds: Once again Democrats have saved the country with no help whatsoever from the disloyal opposition.

    That statement says it all. After 9/11, members of the Congress from BOTH PARTIES locked arms and sang on the steps of the Capital. The loyal opposition (the Democrats) supported the country and the president.

    When Obama took office, the economy had a 9/11 of its own. Job loss was 600,000 plus per month, the stock market had lost half its value, the housing market was still bottoming out, and the strain of two failed wars was adding fuel to the fire.

    What was the response of the (dis)loyal opposition (the Republicans)? Unwavering opposition to all of Obama’s policies, a pledge that their #1 goal was to make Obama a one-term president, and obtsructionism taken to a whole new level, with their ultimate goal being to make it impossible to govern the country.

    It took a while, but the economy is in pretty good shape. Not bad, considering it was primarily the policies of the GOP that wrecked it in the first place. Even the budget deficit, which was over a trillion dollars when Bush handed it iff to Obama, is half of that amount now.

    Bottom ine is that the GOP acted like traitors when the country was in really bad shape.

    Like or Dislike: Thumb up 9 Thumb down 1

  13. anjin-san says:

    When Obama took office, the economy had a 9/11 of its own.

    To be more precise, the economy had a 9/11 of it’s own before Obama took office. He had to deal with the wreckage he inherited.

    Like or Dislike: Thumb up 8 Thumb down 0

  14. stonetools says:

    Meanwhile Obamacare is turning out to be good for Medicare ( I post it on this thread because Doug doesn’t post favorable Obamacare news):

    July 29, 2014 – More than 8.2 senior citizens and people with disabilities covered by Medicare have saved $11.5 billion since 2010 as a result of the Affordable Care Act, according to data released by the Department of Health and Human Services. Obamacare was just yesterday credited with extending the life of Medicare benefits. This news also comes on the heels of continued historic low levels of growth in Medicare spending.

    According to the recent Medicare Trustees report, the life of the Trust Fund has been extended to 2030, up from its projection of 2017 in 2009, and Part B premiums are expected to stay the same rather than increase for the second year in a row. Additionally, a new HHS report found that per capita, Medicare spending growth has averaged 2 percent over 2009 – 2012, and nearly 0 percent in 2013, one-third of the growth rate over the 2000-2008 period.

    “Thanks to the Affordable Care Act, seniors and people with disabilities are saving on needed medications,” said HHS Secretary Sylvia M. Burwell. “By making prescription drugs more affordable, we are improving and promoting the best care for people with Medicare.”

    This is the law that the sociopaths in the Republican Party are trying to sabotage, along with economy. Really , “traitor” is the word for them.

    Like or Dislike: Thumb up 5 Thumb down 0

  15. Tyrell says:

    This is the fifth anniversary of the so-called “Stimulus” package. While there were some people who were actually helped, such as teachers whose jobs were saved for at least a year, a lot of money wound up on such “worthy, high priority” projects as: $1.3 million on road signs to advertise the stimulus. Free trees to wealthy neighborhoods. A Communist puppet theater in Minnesota. Pay college students to write journals about their alcohol and drug use. A tunnel for turtles. A study of drunken mice. A study of Twitter.
    I would say that a lot of the money wound up in the pockets of university professors and politicians. Billions of that money has never been accounted for, just gone. There should be an audit and accounting of every penny.
    A better use would have been to give each family a thousand dollars that could be spent on paying on credit cards, college loans, books and computers, home improvements, new appliances, and school supplies.
    “Those shovel ready jobs turned out to be not so shovel ready” President Obama
    “Top Ten Stimulus Package Outrages” Washington Free Beacon

    Like or Dislike: Thumb up 0 Thumb down 3

  16. stonetools says:

    @Tyrell:

    Actually, the stimulus worked. Read and learn something from actual economists, mister:

    Amazingly, there are still some holdouts in the political and economic community who insist that the Obama stimulus failed–that is, failed to arrest a steep fall in economic output and launch a period of growth in gross domestic product, jobs, stock market valuations, and other metrics that continues to this day.

    Menzie Chinn of the University of Wisconsin and Jeffrey Frankel of Harvard (and a former Clinton administration economics advisor) have just ganged up on the stimulus deniers. Their analyses are timely, since the stimulus has just passed its fifth birthday: The American Recovery and Reinvestment Act was signed into law on Feb. 17, 2009.

    Chinn observes (and shows his work via a series of telling slides) that the launch of ARRA coincides almost exactly with the bottoming out of the stock market, the reversal of a trend of increasing negative GDP growth and an almost unbroken record of positive growth since the end of the first quarter of 2009.

    Try not to be a dunce like the stimulus deniers mentioned in article. You’re welcome.

    Like or Dislike: Thumb up 3 Thumb down 1

  17. anjin-san says:

    @ Tyrell

    Your stimulus dollars at work

    Like hundreds of thousands of other bay area residents, I have to go through this tunnel to drive to San Francisco. This has fixed a nightmare traffic bottleneck, improving the daily lives of quite a few American citizens. It’s also reduced pollution, gas use, and wear and tear on a whole lot of cars – a great benefit to the bay area economy, which is kinda important to the country as a whole.

    Like or Dislike: Thumb up 2 Thumb down 0

  18. humanoid.panda says:

    @Tyrell: This text sounds like something thought up by Sarah Palin after a drink or five too many. Depending on whether you are trolling or not, I either take my hat off to you or hope your home has no sharp objects, because if you really believe this drivel, I truly wonder if you have the mental capacity to operate them.

    Yes, I know this is ad-hominem, but really, repeating the same inane argument that had been refuted tens of thousands of times already deserves nothing better.

    Like or Dislike: Thumb up 2 Thumb down 0

  19. Hal_10000 says:

    And I was so sure Q1 was the result of the Obama Doom…

    No, bad news gets blamed on “austerity”. When we get good news, we suddenly forget about it.

    Read and learn something from actual economists, mister:

    Those same economists told us the stimulus was way too small and that the austerity of the last four years was sure to stop the recovery. In fact, every time bad economic news comes out, they drag out austerity and a too-small stimulus. They need to make up their minds.

    Like or Dislike: Thumb up 0 Thumb down 0