Economy Grew At Anemic 1.7% Rate In 2nd Quarter

The first report for 2nd Quarter GDP growth is out and, while its better than expected, it’s still not very good:

The United States economy performed a bit better than expected in the second quarter, shrugging off some of the impact from higher taxes and lower federal spending in the spring, the government reported Wednesday.

The gross domestic product grew at an annual rate of 1.7 percent, hardly indicative of an economic boom, let alone enough to bring down elevated levels of unemployment soon. It is also the third quarter in a row in which growth failed to top 2 percent, the average since the recession ended in 2009.

Still, the increase was an acceleration from growth in the first quarter of 2013, which was revised downward to 1.1 percent from an earlier estimate of 1.8 percent by the Bureau of Economic Analysis.

“It was a reasonable performance,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “In the long run, it’s not enough but I’ll take growth wherever I can get it.”

The economy’s trajectory is being closely watched by the Federal Reserve as it determines whether to ease its huge stimulus efforts. Fed policy makers will conclude a two-day meeting Wednesday and issue their latest statement on the economy early Wednesday afternoon.

On Wall Street, stocks rose modestly as traders readied for the Fed announcement, watching closely for any change in the language of the statement that might indicate the central bank’s course.

Many economists had anticipated growth of below 1 percent in the second quarter, as automatic spending cuts imposed by Congress and higher taxes that went into effect this year began to bite.

Federal spending did decline by 1.5 percent in the second quarter, but the drop was not as severe as the falloff in government spending in earlier quarters. Meanwhile, exports rose 5.4 percent, reversing a decline in the first quarter.

Most experts predict growth will pick up in the second half of 2013 as the drag from the federal spending cuts and higher taxes begins to fade.

“On balance it was a positive report showing a healthier economy than previously believed,” said Michelle Meyer, senior United States economist at Bank of America Merrill Lynch. “But growth has slowed in the past few quarters, reflecting fiscal tightening in Washington.”

The chairman of the Federal Reserve, Ben S. Bernanke, has hinted the Fed will soon begin tapering, or winding down part of its extensive bond purchases aimed at stimulating the economy, but the timing is uncertain.

On Wall Street, analysts and traders are speculating the Fed could start tapering as early as September if the economy enjoys healthier growth and the job situation improves, or it could be delayed to December or beyond on evidence of weakness.

While the Federal Reserve is not expected to announce a change in policy later in the day Wednesday, the economic data in the second quarter paints a more vigorous picture than anticipated and may increase the odds that the Fed will taper sooner rather than later.

Neil Irwin explains why this report isn’t exactly good news:

[T]he bad news is this: The better-than-expected second-quarter number came at the expense of a downward revision to estimates to the first part of the year, from 1.8 percent to 1.1 percent. Add in anemic growth (at only an 0.1 percent pace) in the fourth quarter of 2012, and we’ve now faced nine months of an expansion at a bit less than a 1 percent annual rate. Every two steps forward for growth seems to be accompanied by a step and a half back.

It would be one thing if that kind of slow growth was happening in a time of full employment, when the economy was basically sound. But with 7.6 percent unemployment, the nation could really use a few quarters in a row of 4, 5 or 6 percent growth to get us back to where people can really be pleased with the economy. It’s not an outlandish view; that’s exactly what happened in the early 1980s, in the aftermath of the last very deep recession.

(…)

Those of us who pore over government economic statistics have on some level become so accustomed to mediocrity in the U.S. recovery, and know enough about Rogoff-Reinhart (research showing slow recoveries tend to follow financial crises), and how much worse things are in certain other advanced nations (cough, Spain, cough) that we grade these economic reports on a curve.

The numbers may be objectively quite unimpressive, but after four years of seeing data almost exactly like this, we can only approach this report with a bit of resignation. The economy is doing about what we thought it was doing — maybe a little better, maybe a little worse.

But 1.7 percent growth isn’t good in the environment we’re in, even if it is a little better than economists thought the number would be. It isn’t even mediocre. It’s terrible. It’s a sign of the diminished economic expectations that economy-watchers have set for themselves that it’s anything to crow about at all.

In other words, welcome to the new slow-growth normal? It’s beginning to feel that way, and that’s not a good thing.

FILED UNDER: Economics and Business, Quick Takes
Doug Mataconis
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. Before joining OTB, he wrote at Below The BeltwayThe Liberty Papers, and United Liberty Follow Doug on Twitter | Facebook

Comments

  1. nitpicker says:

    Yeah, it’s like a total mystery what could be holding back GDP…

  2. Tillman says:

    What you’re seeing is the power of the private sector. It’s a testament to American exceptionalism in some ways that despite government dysfunction our businesses can produce growth of any kind.

    But it’s not as impressive as its proselytizers have made it out to be for decades.

  3. C. Clavin says:

    “…But with 7.6 percent unemployment, the nation could really use a few quarters in a row of 4, 5 or 6 percent growth to get us back to where people can really be pleased with the economy. It’s not an outlandish view; that’s exactly what happened in the early 1980s, in the aftermath of the last very deep recession…”

    OK…well let’s see…in the early ’80’s Reagan was actively growing the public sector.
    This chart tells you everything you need to knw about our slow recovery.
    http://www.epi.org/publication/public-sector-job-losses-unprecedented-drag/ Please…someone…anyone…show me when we have had 4, 5, or 6% growth while at the same time slashing the Public Sector. Anyone?

    “…Those of us who pore over government economic statistics have on some level become so accustomed to mediocrity in the U.S. recovery, and know enough about Rogoff-Reinhart (research showing slow recoveries tend to follow financial crises), and how much worse things are in certain other advanced nations (cough, Spain, cough) that we grade these economic reports on a curve…”

    Of course Rogoff and Reinhart’s work…the basis of the right-wing radical experiment with austerity…has been shown to fatally flawed.
    (Of course you wouldn’t know that if you only paid attention to OTB.)
    Seriously, Doug…if this is the best you can do on the subject why not just stick to what you know? Like Weiner.

  4. C. Clavin says:

    Here’s what else Irwin wrote…which Doug left out for some ideological reason:

    “…And government spending was rising, amid the Reagan defense build-up and stable spending by state and local governments. This time around, however, government has tended to be a drag (and often more of a drag than it was in the second quarter)…”

    He even includes a nice graph to illustrate what Doug always chooses to ignore.
    Seriously…what a hack.

  5. stonetools says:

    Dunno whether Doug is being disengenuous, or whether Doug is really just that clueless. I mean just about every serious economic pundit knows why economic growth is this slow, and what can be done to make the economy grow faster and add more jobs.Is Doug seriously contending that this is the “new normal”, and that that there is NOTHING that can be done?

    Lets just turn to the The Economist, a great newsmagazine (maybe best in the world) and center-right in its orientation:

    Economically speaking, however, I think Mr Summers’ line is one that ought to inspire a lot of reflection:


    It was my judgment as an economist that there was no danger of doing too much stimulus and one should achieve as much stimulus as possible.”

    I’ve been trying to think of a situation in which a country like America—rich, with good institutions and able to borrow in its own currency—has dangerously overstimulated its economy. When has a country like America and in America’s position opted to do too much fiscally or monetarily, such that it found itself in a dangerous and irreversibly inflationary situation? There aren’t that many data points, but I don’t believe there’s been such a case. Mr Summers is right; the risk to doing too much was minimal, while the risk to doing too little was significant. There was a strong case for policymakers to say, look, we’ll continue to act until we’ve solved the problem or markets demand that we stop. Would there be the potential for waste and inefficiency in this approach? Absolutely. There is no question that more government involvement in the economy would have generated some misallocation of resources. At the same time, America has come nowhere close to making all of the positive-return public investments available. And the real economic cost of the present sustained, long-term employment is frightfully high. Stimulus sceptics have not demonstrated, haven’t come close really, that stimulus can’t raise employment or that increased employment wouldn’t be preferable to the status quo

    Note the date on this quote: July 3, 2011.

    For more than two years its been very clear that we should be doing more stimulus to grow the economy. It’s not just Krugman: Its the overwhelming consensus among economic experts. But Doug keeps pretending that nothing can be done.
    It’s like a creationist arguing that there is no evidence for evolution, while ignoring everything biologists have to say on the issue.

  6. anjin-san says:

    A small percentage of the population more or less owns the country now. They are doing just fine. What’s hard to understand about our current situation? I would think someone like Doug, who has given his tacit approval to Republican policies, would be pleased.

  7. C. Clavin says:

    “…Dunno whether Doug is being disengenuous, or whether Doug is really just that clueless…”

    Show of hands…

  8. anjin-san says:

    @ Doug

    In other words, welcome to the new slow-growth normal? It’s beginning to feel that way, and that’s not a good thing.

    What specific policies do you support to remedy this situation?

  9. Pinky says:

    In other words, welcome to the new slow-growth normal? It’s beginning to feel that way, and that’s not a good thing.

    Every time there’s a slow recovery, we act like this is the new normal. Every time there’s a boom, we think the future is going to be nothing but boom. Every time there’s a recession, we convince ourselves that growth is just an illusion. People need to exercise their long-term memories.

  10. Moosebreath says:

    @Pinky:

    “Every time there’s a slow recovery, we act like this is the new normal. Every time there’s a boom, we think the future is going to be nothing but boom. Every time there’s a recession, we convince ourselves that growth is just an illusion. People need to exercise their long-term memories.”

    Exactly. This recovery was slower than the 2001 recovery, which was slower than the 1992-93 recovery, but all were slow by historical standards. I’ve seen several theories on why recoveries seem to be slower, ranging from over-investment in tech to off-shoring to income inequality, but have not seen anything definitive.

  11. gVOR08 says:

    @Moosebreath: Normally we have a recession because the Fed raises interest rates too high. We start a recession, the Fed says,”Oops, our bad”, and then they cut rates, Congress votes fiscal stimulus, and we recover. (I made up the part about the Fed acknowledging responsibility. Pure fiction.)

    This time we crashed because of a fragile, over-leveraged financial industry. The banks had lots of money, then suddenly they were bankrupt. A “balance sheet recession”. These always lead to slow recovery. The Fed can’t cut interest rates because they’re already essentially zero, the “lower bound”. Congress, or at least the GOPs in Congress, won’t consider any more fiscal stimulus than the half-ashearted package we already did. So here we are.

  12. Moosebreath says:

    @gVOR08:

    All true, but 2001 and 1992-93 recoveries were not from balance sheet recessions. The Austerians were not sabotaging the recoveries then. Interest rates did not approach zero. So why were they so slow?

  13. Ben Wolf says:

    I hope everyone now understands not to rely on the initial figures. Expect the 1.7% to be revised downward, probably well below 1.5%.

  14. Ben Wolf says:

    @Moosebreath: The average length of recessions in the U.S. over the last century is thirteen months. 2001 only lasted eight months according to the BEA.

  15. Moosebreath says:

    @Ben Wolf:

    “The average length of recessions in the U.S. over the last century is thirteen months. 2001 only lasted eight months according to the BEA.”

    That seems unrelated to my question, which was why the recoveries have been so slow.

  16. Pinky says:

    @stonetools:

    It’s not just Krugman: Its the overwhelming consensus among economic experts.

    That’s just not true. I’m not taking sides here, but that simply isn’t true. Some blame low interest rates, or the European debt crisis, or the US debt level (public and/or private), or the impact of the tax code and regulation, or too much trade, or too little trade, or too much of a trade deficit, or overly high property values, or overly low property values. Or the impact of the baby boom, or new financial regulations, or a lack of new financial regulations, or a lack of high-skilled labor, or the cost of low-skilled labor…you get my point.

  17. Lynda says:

    @C. Clavin:

    Of course Rogoff and Reinhart’s work…the basis of the right-wing radical experiment with austerity…has been shown to fatally flawed.

    One quibble and sorry if it is off topic – just because an economist screws up a data sample (even such a very large chunk as R&R did) it doesn’t invalidate everything they ever wrote on the whole topic of economics. It has been a while since I read it but IIRC my conclusions from “This Time is Different” were
    1) Banking crisis have happened across a wide range of political, economic and cultural situations. It is almost as if humans have a lemming-like desire to periodically jump off a credit cliff.
    2) Humans are creative – if one avenue to the credit cliff is blocked we are inventive at finding others
    3) Housing booms often lead to banking busts and they take a very long time to recover from. Therefore would be good idea to either stop housing booms or ameliorate their inevitable busts – preferably both due to the creativity mentioned above
    4) This time is not different – beware people trying to sell you a secret sauce that will ensure success.

    I was therefore surprised when many people’s takeaway from the book was that there IS a secret sauce to success and it was debt/GDP ratio. I don’t know how much this was R&R’s belief or whether their data was hijacked.

    Even if I dismissed all their debt work as invalid, their research on how banking crisis happen, their typical length and some of the prescriptions on how to get out of them (their proposals are not austerity only) are worthwhile reading. YMMV

  18. Pinky says:

    It was silly for anyone to think that Rogoff and Reinhart conclusively showed that a particular debt/GDP ratio was a breaking point. Just like there’s no blood pressure beyond which you’re doomed but within which you’re fine (although 0/0 can’t be good). The blood pressure squeezer thingie is still a very important diagnostic tool.

  19. rudderpedals says:

    As a practical matter, what R&R thought is irrelevant. R&R’s discredited bits were sold as proof of the inevitability of going over a cliff at IIRC 80% debt/GDP ratio. Per Cokie’s Law it’s their mess.

  20. Tillman says:

    @Pinky: Well, it’s not an overwhelming consensus like that around, say, climate change, but 65% is a majority for “lack of demand” being the big factor holding unemployment up and dragging the recovery down.

  21. al-Ameda says:

    Republicans wanted a reduction in government employment and reduction in the rate of spending, and we’re seeing the results of the anti-growth policies they advocate. Who can possibly be surprised?

  22. An Interested Party says:

    It’s quite amusing that any libertarian would complain about this weak economy when it is clear that a great way to improve the economy is a set of policies that libertarians are diametrically opposed to…

  23. Ben Wolf says:

    @Moosebreath: Eight months isn’t slow when the average is thirteen.

    @Pinky

    We can track sectoral flows to see the private sector has been saving hard for the past five years. An increase in the rate of saving means a reduction in spending by definition, which means insufficient demand.

  24. C. Clavin says:

    “…I was therefore surprised when many people’s takeaway from the book was that there IS a secret sauce to success and it was debt/GDP ratio. I don’t know how much this was R&R’s belief or whether their data was hijacked…”

    Agreed…there is no doubt it was hijacked…and did become a key element of the rationalization of the extremeists who now run the Republican party for their wildly experimental austerity in the face of recession.

  25. C. Clavin says:

    @ Pinky…

    “…That’s just not true. I’m not taking sides here, but that simply isn’t true. Some blame low interest rates, or the European debt crisis, or the US debt level (public and/or private), or the impact of the tax code and regulation, or too much trade, or too little trade, or too much of a trade deficit, or overly high property values, or overly low property values. Or the impact of the baby boom, or new financial regulations, or a lack of new financial regulations, or a lack of high-skilled labor, or the cost of low-skilled labor…you get my point….”

    And some blame unicorns.
    Many psuedo-scientists also doubt climate change…but they are wrong too.
    You do not even have to be an economist to look at history and see that what we are now doing…slashing the Public Sector in the face of a recession and recovery…is a$$-backwards.
    Republicans are holding back the recovery. Pure and simple.
    That may go against your ideology…it clearly does Doug’s…but that should make you and Doug question your ideology…not the logical conclusion.

  26. Tyrell says:

    One problem is that people who are returning to work are taking low end jobs that students and retired people used to get. Also, states are cutting employees and benefits. I never saw a time when so many people in education are losing jobs, seeing benefit cuts, or having flat wages for the last few years. North Carolina is even cutting out extra pay for those teachers with advanced degrees. Dumb. Dumber.

  27. Moosebreath says:

    @Ben Wolf:

    “Eight months isn’t slow when the average is thirteen.”

    The recovery took only 8 months in 2001? Do tell.

  28. Moosebreath says:

    @Moosebreath:

    To the contrary, data in wikipedia suggests that unemployment did not peak until June 2003.

    “The Labor Department estimates that a net 1.761 million jobs were shed in 2001, with an additional net 545,000 lost during 2002. 2003 saw a small gain of a mere 62,000 jobs. Unemployment rose from 4.2% in February 2001 to 5.5% in November 2001, but did not peak until June 2003 at 6.3%, after which it declined to 5% by mid-2005.”

  29. C. Clavin says:

    According to the AP:

    “…U.S. factory activity expanded in July at the fastest pace in two years, fueled by surges in new orders, production and hiring The gains show manufacturing is rebounding and should provide a spark to growth in the coming months…”

    Tillman is spot on in his comment above…the fact that we are growing at 1.7% in the face of Government dysfuntion and ill-advised blunt trauma austerity is a testament to the resiliency of the American Private Sector.
    Now if only Republicans would get out of the way the economy could really get rolling.
    Until then Doug is getting the economy he wants…and he is still whining.

  30. Pinky says:

    Don’t equate a government stimulus package with increased demand: RealClearMarkets.

  31. C. Clavin says:

    Pinky…
    RealClearMarkets is a right-wing site pushing radical right-wing ideas that have been shown to be…well…wrong.

    “…The key part of this concept is that every buyer requires a seller; you cannot buy a product unless somebody has manufactured it and is ready to sell…”

    This is a$$-backwards…and it is the heart of Supply-Side Economics.
    Also…it has never, ever, worked.
    Today, manufacturers are sitting on tons of cash. Because the have no buyers…no demand for their products. No smart industrialist is going to make anything for which no market exists. You do not make things in the hope that a market appears. You need to see demand, or at least potential demand, first.
    Today my firm is hiring. We are hiring because we have demand…and we need workers to fill that demand. Absent that demand…we were not hiring anyone…for obvious reasons.
    Also…investment in infrastructure, and education, and the hiring of cops and teachers and firefighters is not short-term stimulus. It is simply business as usual. Today we are not operating as usual…we are cutting the Public Sector. Ask the guy that wrote that opinion piece if he can name a single episode in history when an economy grew robustly while cutting the Public Sector.
    This link shows you everything you need to know about this recovery.
    http://www.epi.org/publication/public-sector-job-losses-unprecedented-drag/

  32. Pinky says:

    @C. Clavin:

    Ask the guy that wrote that opinion piece if he can name a single episode in history when an economy grew robustly while cutting the Public Sector.

    Dorfman has written on that subject, citing statistics from Europe showing that the countries implementing austerity programs have grown faster than their counterparts. As for EPI, I could say that they’re a left-wing site pushing radical left-wing ideas that have been shown to be…well…wrong, but the truth is I haven’t had a chance to read the article yet. But my original point stands: that commenters on this thread are assuming that (a) economists agree that a fiscal injection is the solution for our current economic problems, and (b) that Republicans deliberately oppose it in spite of economists’ recommendations.

  33. C. Clavin says:

    “…Dorfman has written on that subject, citing statistics from Europe showing that the countries implementing austerity programs have grown faster than their counterparts…”

    Pretty much all of Europe has shown that austerity in the face of recession does not work. Some may have grown faster than others…but that bar is so low it doesn’t matter. And there are other factors beyond austerity at play in meager growth.
    I bet you Dorfman was a huge fan of Irish economics until that one crashed too.
    All you need do is look at the EPI graphic…don’t bother with the text…the facts and figures tell the entire story.
    Or this one.
    http://www.nytimes.com/interactive/2012/05/04/business/economy/off-the-charts-shrinking-government.html?ref=economy&_r=0
    Or this one.
    http://dailydish.typepad.com/.a/6a00d83451c45669e20168e8f57e89970c-800wi

  34. Tillman says:

    @C. Clavin:

    RealClearMarkets is a right-wing site pushing radical right-wing ideas that have been shown to be…well…wrong.

    I wouldn’t describe the RealClear bunch as “radical” right-wing, but they are right-wing. They do still adhere to supply-side economics as the basis for economic assumptions.

    @Pinky:

    Dorfman has written on that subject, citing statistics from Europe showing that the countries implementing austerity programs have grown faster than their counterparts.

    In comparison to us, with our half-assed stimulus followed by half-assed austerity (honestly, we didn’t go full throttle down either path), Europe is not growing very much at all. There are a number of other factors that play into it, but the stimulus was shown by the Congressional Budget Office to have offset the worst of the recession. Europe (in aggregate) is closer to what we’d look like without any stimulative action.

  35. C. Clavin says:

    @ Tillmann…
    Yes… a right wing site pushing supply-side economics…which is an abstract theory that has been shown not to be vaild…and is thus…radical.

  36. Pinky says:

    @C. Clavin: This is circular reasoning. “Supply-side” economics can explain the boom of the 1980’s, as can the Keynesians. The fact that one side can explain it according to their models doesn’t disprove the other side’s models. The recent weak recovery was predicted beforehand by the supply-side economists; the Keynesians were cautioning that the stimulus might not be big enough, but weren’t forecasting the current economic weakness. A few more points go to the supply-siders this round, but again, nothing conclusive.

  37. Ed Stephens says:

    @al-Ameda: Anti-growth policies? What planet are you from? It’s the economically illiterate policies of the democrat party and teleprompter-in-chief in the White House that salivate at every turn to bring us to an economic free fall, and they’re succeeding, it’s the GOP that is the only stop gap to your shangri la lunacy that has kept it from falling any faster. The democrat party and obamanomics advocacy groups can’t see the forest for the trees in their attempts at turning America from the leader in economic standards into a 3rd world nation of Greek proportions. They’re following what took down Detroit and what is taking down California. The saying used to be “California or bust” now it’s bust and we’re California! Hooray!

    Government needs to stop spending, get out of the way of progress, i.e. business, aka. ‘job creators’ so the economy can actually grow, like it did for most of Bush’s presidency until the democrat party took over Congress in 2007 and implemented their next series of taxing and spending like drunken sailors.