Economy Rebounds In Second Quarter, But Weakness Remains

The economy rebounded from it's winter shock, but it still doesn't seem strong enough to justify the Federal Reserve's plan to raise interest rates.

Economy Heartbeat

After another dismal first quarter in which the economic growth actually turned slightly negative, the first release of the second quarter’s Gross Domestic Product numbers seems to indicate that things got better after the weather warmed up:

The American economy regained its footing last quarter, expanding at an annual rate of 2.3 percent amid a better trade picture, growing consumer spending and a resilient housing sector.

The rebound in April, May and June was largely expected, after a dismal performance in the first quarter of 2015, when the economy actually contracted slightly.

Before the report on Thursday from the Commerce Department, analysts on Wall Street had been expecting to see a growth rate of about 2.5 percent for the second quarter.

Although hardly exceptional by the standards of the 1990s or even compared with the 5 percent burst of growth in the summer of 2014, the pace of expansion is largely in line with the trajectory of the recovery, which began exactly six years ago.

And if it continues at the same pace in the coming months, the economy’s underlying momentum means the Federal Reserve is likely to begin its long-awaited move to raise interest rates from historic lows by year end.

On Wednesday, Fed policy makers issued an upbeat assessment of the economy’s progress after concluding a two-day meeting. But they left interest rates near zero, where they’ve been since late 2008, when the recession and financial crisis reached a nadir.

Most experts are looking for a move by the central bank this year, although opinion is divided over whether that means an increase when Fed policy makers next meet in September, or at their final meeting of the year in December.

As for the last quarter, much of the improvement in the economy came from a better trade balance, especially in terms of exports.

Hammered by a one-two punch from a stronger dollar and then a labor slowdown at West Coast ports, net exports reduced growth by nearly 2 full percentage points in the first quarter of 2015 and by 1 percentage point in the fourth quarter of 2014.

That was the worst two-quarter trade performance since 1998, according to a report by Morgan Stanley, but as the ports began functioning normally again this spring and the dollar stabilized, the drag from trade seems to have eased.

In addition to the impact on the headline growth numbers, the trade balance will also be watched by experts who want to gauge the degree by which economic distress overseas is affecting American exporters.

Once again, it appears that the downturn that we saw in the first quarter of the years was an anomaly related to winter weather rather than an indication of a developing trend. The downturn from January through March of this year wasn’t as bad as it had been in 2014, of course, when the economy shrank by 3%, but the underlying reasons behind what happened appear to be the same. What seems to have happened in both cases is that bad weather combined with an economy that, while it continues to grow, still has elements of weakness and vulnerability that lead to downturns from something as largely predictable as the weather. We’ve had rough winters in the past, even in the recent past, but it’s only been in recent years that we’ve seen those winters have such a dramatic impact on economic growth that they actually end up causing the economy to contract when it should be expanding. That suggests that, notwithstanding the fact that the economy is growing at 2.5% to 3% rate, there are still underlying weaknesses that make it vulnerable to economic shocks. That last point is relevant because of the potential impact of the financial downturn currently gripping China on the American economy given the size of our export markets, but it may not be until well into the third quarter before we know what if any impact those events may have here at home.

Given all of this, the Federal Reserve’s current policy seems somewhat puzzling. Based on the statements released today, as well as other recent statements, it seems clear that the Federal Reserve is on track to raise interest rates at some point before the end of the years. Given the fact that rates have been near zero for some time now, it is inevitable that they are going to be raised at some point, but it’s unclear why that has to happen now. There doesn’t seem to be any evidence of inflation at the consumer or wholesale level, the employment reports over the past few months have shown that there is still a lot of slack in the labor market, and the past two years have shown that the economy is vulnerable to economic shocks from the weather, which is a factor that it has usually been able to absorb in the past. Taking all of that into account, I’m not entirely convinced of the wisdom of slowing the economy down by raising interest rates even slightly. Obviously, the Fed is concerned with keeping the economy growing at a healthy pace without stirring up inflation, and that’s a proper goal for them to aim at. At the same time, though, the fear of inflation seems so wildly out of place at the moment, and the economy still seems so vulnerable, that I’m not sure that the “inflation hawk” strategy is the right way to go.

FILED UNDER: General, ,
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 and contributed a staggering 16,483 posts before his retirement in January 2020.

Comments

  1. al-Ameda says:

    Before the report on Thursday from the Commerce Department, analysts on Wall Street had been expecting to see a growth rate of about 2.5 percent for the second quarter.

    Although hardly exceptional by the standards of the 1990s or even compared with the 5 percent burst of growth in the summer of 2014, the pace of expansion is largely in line with the trajectory of the recovery, which began exactly six years ago.

    Slow steady economic growth, nearly unbroken growth, since the financial catastrophe of 2008. Unemployment slowly declining, inflation low, the loss in housing values completely recovered, and the equities market are at or near record highs.

    All of that aside, I can see why so many are interested in characterizing good economic performance as weakness.

  2. grumpy realist says:

    Reading the WSJ letter pages today–contains the usual symphony of weasel-worders, obsequious trogs, and brown-nosers. The guy I would really like to have dumped in the middle of Somalia is the idiot who is bitching about how workers never really produce anything and it’s obviously the wise, godly, and fantastic owner of the company who deserves all the loot because of his “risk taking” and far-sightedness and great vision.

    Considering that the example of a poor shlub of a worker he mentions as not deserving more than 50 cents an hour is a fast-food worker, I wonder why Mr. Brown-Noser imagines a franchise owner to be all that far-sighted and with great vision. As far as I can tell, a Mickey D’s franchise is about the most fail-proof business out there.

    But then, these are the sorts of people who think that Trump is a Great Businessman.

  3. michael reynolds says:

    @al-Ameda:

    Had you told people in 2008 that Mr. Obama’s terms in office would see this unbroken run of positive news he’d have been elected by acclamation.

    Doug, you’re still contrasting unfavorably this more rational, more real, economic progress with the sort wild fluctuation that’s thrilling going up but miserable coming down. As if the tech bubble and the financial/real estate bubble were the norm and we should all want to see that happen again.

    “Underlying weakness” is a nonsense phrase. There is always “underlying weakness” that might be subject to this or that shock. Is there such a thing as an invulnerable economy? Obviously not. The phrase is just a silly bit of chin-stroking, the equivalent of “only time will tell.”

  4. Jack says:
  5. Jack says:

    Mods–please release my comment.

  6. stonetools says:

    Bet the Feds won’t raise the rate this year. They’ll talk about it, hem & haw, and then say they will surely raise it next year. There is really zero evidence of renewed inflation, and the Republicans’ austerity policy is still a slight drag on what is turning out to be a slow but steady recovery.

  7. Ron Beasley says:

    It’s time we recognize that that the days of unlimited economic growth are over. We have harvested all of the “easy” natural resources. That includes not only fossil fuels but metals and most importantly water. Wars will be fought over water not oil. As fossil fuels become more expensive people will be employed growing and harvesting food energy .

  8. humanoid.panda says:

    @grumpy realist:

    Reading the WSJ letter pages today–contains the usual symphony of weasel-worders, obsequious trogs, and brown-nosers

    Oh man- the other day I was trapped in a doctor’s office, with nothing but the WSJ to read. There was a letter to the editor there, scolding Asian Americans for not understanding that they have to vote Republican because they are hard working and value family. That was just an astounding piece of condescencion, that did a perfect job of explainign the phenomenon it was denouncing.

  9. humanoid.panda says:

    @Ron Beasley:

    That includes not only fossil fuels but metals and most importantly water. Wars will be fought over water not oil.

    I wouldn’t make blanket statements like that.

    Israel is currently getting 70% of its water from desalinized sea water, and the other 30% get recycled – so that almost no use is made of ground and lake water. Now, imagine you plugged in that system into a large array of solar panels- and here goes a very serious set of restrictions on future growth.

  10. Tyrell says:

    The economic recovery has brought such lucrative jobs opening up in the fields of sidewalk cleaners, school crossing guards, door to door vacuum cleaner sales, and newspaper subscription telephone sales.

  11. gVOR08 says:

    Not my line of territory, but I wonder if a part of the problem with the winter numbers is that they’re seasonally adjusted. The history based corrections may not be working well in current circumstances.

  12. al-Ameda says:

    @Jack:
    Sorry Jack, but recovering from the worst economic failure since 2008 was and is taking longer than a New York Minute.

    You may not know this but about 25% of the wealth of America’s businesses and households – about $18 Trillion – was lost in the crash. This was not some minor recession that we put aside in 12 months and re-commence with the 5% growth.

    In fact, if a Republican president ran for re-election on Obama’s economic record conservatives would be planning “Mission Accomplished” parades in cities across the country.

  13. Jack says:

    @al-Ameda:

    All of that aside, I can see why so many are interested in characterizing good economic performance as weakness.

    I replied to your characterization that this was good economic performance by listing numerous negative economic indicators, which you, and Obama, simply brush aside by saying don’t look at what’s going on over here, just focus on what I want you to focus on.

    Smoke and mirrors.

  14. Pinky says:

    @Jack: I wish I could have saved up a month of up-votes and used them all for what you just did. (I’d still have to give one to Cliffy for what he said about Tom Brady yesterday, though.)

  15. grumpy realist says:

    @humanoid.panda: I remember a very indignant article to the local newspaper complaining about the raises the UIUC faculty had just received. His argument was that since they were public employees, they shouldn’t be paid anything higher than the average income in Illinois.

    There are some real dummies out there. And I’m sure this guy considered himself a “real self-made businessman.”

  16. DrDaveT says:

    @Jack:

    Home ownership at its lowest since 1967.

    OK, I’ll field this one.

    The Census Bureau definition of “homeownership” does not actually distinguish between owning a home and living in a home owned by your bank. It is surprisingly hard to find data on actual ownership of homes, but a great deal of the growth in “homeownership” has been driven by the striking increase in household debt. An increase in people with enormous mortgages is not an economic positive.

    Who’s next?

  17. DrDaveT says:

    @Jack:

    I replied to your characterization that this was good economic performance by listing numerous negative economic indicators

    The patient was beaten with chains and tire irons by gang members and left in a ditch, where he was subsequently mauled by feral dogs.

    He was taken to the hospital barely alive, where doctors got him stabilized, stopped the bleeding, and repaired the worst of the damage. He was in Intensive Care for a month, bedridden for a year, and is still in PT.

    He lost some fingers. He still limps, and doesn’t really have his upper-body strength back yet. His tennis game has tanked. And you’re claiming that this is strong evidence of malpractice? Sheesh.

  18. Kari Q says:

    @Jack:

    Minority unemployment at historic highs.

    Both links are several years old. One is from 2009, one from 2013, and they are not talking about ‘minority’ unemployment but youth and minority youth – traditionally groups with very high unemployment rates. The unemployment rate is coming down slowly, so it’s no surprise that the groups that have always found it hardest to find a job are going to be the last to benefit from the improvement. Still, even those groups are seeing some improvement. You can check for yourself http://www.bls.gov/news.release/empsit.t02.htm

    Among blacks age 16-19 the unemployment rate has gone from 38.7% in June 2014 to 31.8 in June 2015.

  19. Ben Wolf says:

    Doug,

    Yellen is aware of the theory that higher interest rates are technically stimulatory via increased flow of interest income to the non-government sector; although because most people think the opposite the initial effects can be contractionary.

  20. Kari Q says:

    I beg your pardon, I used not seasonally adjusted for the first number and seasonally adjusted for the second. Slap of the hand to me, that’s a big mistake.

    Here are the unemployment rates for black youth (the group that always has the highest unemployment) from the month of June only, from 2008 to 2015

    2008 – 35.4
    2009 – 45
    2010 – 46.4
    2011 – 45
    2012 – 44.2
    2013 – 48.6
    2014 – 38.7
    2015 – 38.5

    That jump up to 48.6 in 2013 is interesting, but overall, things are looking better for black youth today than they have for many years.

  21. Kari Q says:

    @Jack:

    Food stamp consumption at historic levels.

    Again, old data. The numbers are trending down. There’s been a 1.7% decrease in the use of food stamps year over year. Indication of an economic recovery that is slowly reaching those hardest hit.
    http://frac.org/reports-and-resources/snapfood-stamp-monthly-participation-data/#apr

  22. Kari Q says:

    Because I got curious about minority unemployment, I checked the statistics there. Adult minorities aren’t doing too badly in terms of unemployment

    Hispanics Men over 20 – 5.8% down from a high of 13.5% in Feb 2010
    Hispanic Women over 20 – 6.0% down from a high of 12.1% in July 2010
    Black Men over 20 – 9.2% down from 20.2% in March 2010
    Black Women over 20 – 7.9% dwon from a high of 14.8% in July 2010
    Asians – 4.1% down from a high of 8.4 in Feb 2010.

    Looks like things have improved for minorities after all.

  23. Tyrell says:

    @DrDaveT: Was this victim someone famous or a friend of yours ? Either way I am very sorry to hear about this and hope they have a quick recovery. I also hope the police catch those responsible so that no one else becomes their victim.

  24. humanoid.panda says:

    @Tyrell: I am more and more convinced that Tyrell is nothing but a long running spoof ran by Michael Reynolds.

  25. JohnMcC says:

    @humanoid.panda: Pretty darn funny, if so.

  26. anjin-san says:

    Hmm. Jack and Pinky think cut and pasting links to outdated economic news with no context is brilliant.

    For years, I have been waiting for conservatives to send their varsity to OTB. The sad fact is, these clowns are the varsity…

  27. Pinky says:

    @anjin-san: What I found funny was that you praised the economy, then Jack criticized it, and you replied “of course, what do you expect?” You didn’t refute anything. Then Jack called you out on it. A person who cares about the economy would have considered his own points versus Jack’s; a person who cares about laudation would have responded just the way you did.

  28. stonetools says:

    Unemployment rate at end of LORD Ronaldus’ second term : 5.4 per cent.

    Current unemployment rate in the middle of Obama’s second term -5.3 per cent and trending downward.

    Math, how does it work?
    That’s just one measure of course. But , objectively considered, the evidence points to the Obama recovery being comparable to the recovery under conservative god Ronaldus Magnus. (PBUH).
    So why do the Ronaldus worshippers esteem that recovery better than Obama’s?
    It’s partly innumeracy,partly the rosy glow of nostalgia, and partly “There is no way the usurping Kenyan ni-CLANG! in the White House can have done as well as LORD Ronaldus, from whom comes everything that is good.”
    Take your pick as to which factors play a role in the arguments-if that’s the word for it- of the conservatives here.

  29. anjin-san says:

    @Pinky:

    What I found funny was that you praised the economy, then Jack criticized it, and you replied “of course, what do you expect?” You didn’t refute anything. Then Jack called you out on it

    Where did I “praise the economy” on this thread? Where did I say “of course, what do you expect?”

    In fact, I never said those things. Are you as confused as you sound?

  30. Pinky says:

    @anjin-san: Is that some kind of joke?

  31. gVOR08 says:

    @Pinky: Out of curiosity, does your browser have anything like a “find on this page” function?

  32. DrDaveT says:

    Pinky is failing to distinguish between mock-Arabic and Japanese — @al-Ameda: vs. anjin-san.

  33. Pinky says:

    Fair enough, and thanks for the catch, Dave.

  34. anjin-san says:

    @ Pinky,

    Thanks for providing proof of concept so quickly 🙂

  35. anjin-san says:

    @ James – You might want to check out Wordfence…

  36. Tillman says:

    Praise to Hal 10000, who called out the port slowdown on the west coast two months ago.

    Also above that comment, you can read about Drew being incapable of understanding climate science with his mighty brain.

  37. JohnMcC says:

    In case anyone is interested in the reason for slow economic growth despite fairly vigorous pump-priming monetary policy from the Fed:

    http://www.usatoday.com/story/money/personalfinance/2015/07/31/wages-grew-q2-slowest-pace-27-years/30927287/

    “Economists have been puzzled by the failure of wages to rise at a faster pace despite a near-normal 5.3% unemployment rate and a shrinking pool of available workers.”