Second Quarter Growth Revised Slightly Upward, Still Below 2%
Economic growth is the key to fixing many of our problems. Unfortunately, we're not likely to see the kind of growth we need any time soon.
The Commerce Department reported its first revision to the Gross Domestic Product numbers for the Second Quarter, first released last month, and while the revision was upward it still isn’t a very encouraging sign:
The economy grew at a slightly faster pace in the second quarter than initially estimated, according to Commerce Department data released Wednesday, increasing at an annual rate of 1.7 percent.
The revision was driven by stronger export growth, along with fewer imports than originally estimated and a slight uptick in personal consumer spending. Inventory growth cooled, underscoring continued caution by businesses about the economic outlook.
And in another sign that the housing market has regained its footing, pending home sales in July rose to their highest level in more than two years, according to data released Wednesday by the National Association of Realtors. The Pending Home Sales Index, which reflects contracts but not closings, rose 2.4 percent from the prior month.
On Tuesday, the latest figures from the Standard & Poor’s Case Shiller Home Price Index showed that home prices rose 1.2 percent nationally in June from the same period a year ago. Home prices remain down almost a third from their peak in 2006, but a firming housing sector is one small bright spot in an otherwise cloudy economic outlook.
Indeed, while analysts had been expecting the small upward revision for quarterly economic growth in the second quarter, up from the initial estimate of 1.5 percent, the latest figures still represent a deceleration in gross domestic product growth from the first quarter, when the economy grew at a 2 percent rate. The anemic pace of the recovery is a critical issue in the presidential election race, and few economists expect the economy to speed up anytime soon. In fact, despite the upward revision on Wednesday, many economists see the economy actually slowing in the second half of the year.
Julia Lynn Coronado, chief economist for North America at BNP Paribas, said she expected economic growth to slow to 1.3 percent in the third quarter, improving only slightly to 1.8 percent in the fourth quarter.
“It’s not disastrous, but it is one reason the Federal Reserve is on high alert,” she said, referring to widespread speculation that the American central bank could soon embark on a third round of monetary easing.
Sluggish growth is a problem that impacts all the other economic and fiscal problems that we’re having today. It means slower, or nearly non-existent job growth in a labor market that is suffering through its longer downturn since the end of World War 2. The unemployment problem feeds into consumer spending, as families cut back on spending either because someone has lost a job or had hours cut back, or because they are concerned that such a thing could happen in the near future. Lower consumer spending impacts the business environment and businesses become less willing to invest in expansions that lead to new investment and new employment. Lower growth also leads to lower tax revenues and, in a classic Catch-22, higher government spending as the bad economy leads to increases in unemployment benefits and other elements of the safety net. That leads to higher deficits at the Federal level and the need to cut spending in order to balance budgets at the state and local level, if not the need for some localities to file for Chapter 9 Bankruptcy protection as three cities in California, and one in Pennsylvania, have done in the past year. It’s all very lovely little vicious circle. If economic growth were just a few points here, many of these fiscal problems would either be non-existent or, at the very least, easier to deal with.
To make it all worse, we have been in the worst economic recovery since World War II:
In terms of economic output, the current recovery is the weakest of any since 1945: Total output is only 6.8 percent higher than when the recession ended in 2009, which was about 12 quarters ago. Compare that to the other really big post-war recession: 1981. After 12 quarters, economic output stood 18.5 percent higher than the end of that recession. Even the really slow recovery from the 2001 recession outdoes the current one: By 12 quarters following the end of the 2001 recession, economic output was 8.9 percent higher.
The weak spots in the current recovery stand out in today’s economic growth report. The Bureau of Economic Analysis traces the sluggish growth rate to slowdowns in the spending of households and businesses and shrinking inventories.
While the media will highlight the weak household spending numbers, the real focus of concern should be on business investment. When businesses hold back on improving and growing their productive capacity, that inaction directly affects hiring decisions and, thus, household incomes. And that’s what businesses appear to be doing this year: They are sitting this economy out.
One of the reasons businesses are sitting on the sidelines, of course, is because of uncertainly over what’s going to happen in Washington. This isn’t so much about the election as it is about what, if anything Congress and whoever gets elected President is going to do about the so-called fiscal cliff. As I noted earlier this month, business owners are expressing an increasing amount of frustration over Washington’s failure to deal with this issue, or even give the business community a signal as to what’s likely to happen at the end of the year. More importantly, though, the most likely outcome is one that doesn’t really deal with the uncertainty that is causing business owners to sit on the sidelines:
The other problem with the “kick the can down the road” idea, of course, is that it really doesn’t solve the uncertainty problems that the business owners and officers quoted in the article above are concerned about, it only puts the day of reckoning off for several months. Absent a prospect that a real deal will be made at some point before the new expiration date, there’s really not going to be any reason for businesses to make the kind of long-term planning that they need to do. That’s really the problem with the way our political system operations anymore. Kicking the can down the road and only dealing with serious problems when a crisis is imminent (i.e., the debt ceiling debacle) have become a regular part of how Washington operates. We’ve known about the “fiscal cliff” for a year now and rather than making an effort to deal with it, both sides in Washington have used the underlying issues of taxes and spending to score political points against their opponents. Business doesn’t operate like that, though, they need to be able to plan things out for the long term, and you can’t do that if you don’t even know where things like taxes and government spending are going to be in six months time. It’s no wonder they’re nervous and not willing to plan for the future when they don’t even know what that future is going to look like when it comes to government policy.
Until our leaders find a way to stop doing that and actually make policy in a rational manner, business is likely to continue playing it safe and staying on the sidelines, an as long as that happens the prospect of seeing that 3-4% growth rate that we really need is going to be pretty bleak.
The people who most like to talk about money on the sidelines are those who don’t try to measure it. The first chart here shows that we are past the peak and that it looks more like deleveraging than deallocation.
It’s worse than the nominal figures suggest. Real GDP (factoring in inflation) will have grown by around 0.5%.
Also, The Myth Of Cash On The Sidelines Has Now Been Revised Away
@john personna:
You poor ignorant slob. That comment at zero deals with the notion that equity values are driven by money on the sidelines. I don’t see any reference in Doug’s post to money on the sidelines. Rather, it’s investment appetite on the sidelines. Way big difference.
But I have a question for you.
If you thought a financial asset worth a dollar today would be worth a dollar in a year, would you buy it? If you had a quarter in your pocket would you buy it? If you had $5 to invest would you buy it? If you had $100 in your pocket would you buy it?
Round two. If you had a quarter in your pocket and you thought the asset would go to $1.25 in a year with your investment, would you buy it? If you had $5 in your pocket and you thought your investment would drive the asset to $6 in a year, would you buy it? If you thought your investment of $100 would drive the asset to $101 in a year, would you buy it?
Think about that. And perhaps take a first course in investment and corporate finance.
Go have fun, ride your bike, and leave corporate finance and investment to others.
I could certainly see worries about the “fiscal cliff” (note: the result of the deal the GOP made but wants to weasel out of, remember) scaring business people. Or people in general, if they’re paying attention.
Something that confuses me, Doug…
The “fiscal cliff” is deficit reduction. It’s stupid, but it’s what the Right claims to want.
So now it’s bad?
@Drew:
LOL, wishes are granted. I actually hoped that you’d try a response.
I don’t see any reference in Doug’s post to money on the sidelines. Rather, it’s investment appetite on the sidelines. Way big difference.
If you can find a way to measure that, go ahead. What I worry though, is that you have retreated from measurable cash to “appetite” precisely because it cannot be measured.
I might allocate to it. Your questions all rely on the listener not thinking asset allocation, though, right?
My goodness, you thought to teach a moment on investment allocation and yet you did not attach a risk to each of those investments?
Who are you, really?
This bit was a quote, of course:
This canard has been debunked numerous times. I think Mike Konczal has the latest.
@this:
Drew wants us to not think cash, but instead think appetite. Can we think of a measurable proxy for appetite?
Why wouldn’t that be a stock index? If people have appetite for business investment they’ll buy equities and drive up prices.
U.S. stocks close at highest in three months
I’m not one to tout stock gains as a Presidential “accomplishment” but I’d think that if “appetite” was low, they’d be going in the other direction. That simple.
@john personna:
Nice try, JP. The usual JP squirm and dodge. You don’t really understand what I said and asked, do you? You don’t even understand the point.
What’s wrong, Wikapedia is down today?
I repeat my query to you. Do you even have a clue what I actually asked you? Are you on the same level?
You get one more squirm and dodge, but I’d advise you to call anyone you know trained in finance quickly………..so you can even carry a rudimentary conversation.
@Drew:
You obviously tried to constrain a comic book example, in the hope I’d go with it, so you could spring some “ah ha” on me.
I have no idea which comic book point you were going for, but there was certainly nothing real there. Different ROIs, no term, no risk, mentioned.
Sorry, everything was one year term. Risk and how much we are allocating to the various “investments” is missing.
@john personna:
Yep. The usual bluff and bluster. No substance.
Look, JP, given the pathetic state of the commentariat here, your BS probably plays with this crew. i hope that gives you comfort. (what a sad state of affairs) Unfortunately, you know that I know that you are absolutely out of you league and desperately attempting to obfuscate. You know it and I know it. Your comments are clear on that.
You refuse to answer my query. Because your understanding of investment and corporate finance are obviously at a high school level, if that.
So have your fun, attempt to save face with the commentariat here with your bluff and bluster, as is your want. But know that you have just publicly humiliated yourself with anyone here with an even Finance 101 level of understanding.
Unfortunately, the current problem with OTB that almost no one has even that. You prey on that.
What a sad life.
@Drew:
LOL, Drew. Seriously. If you had a clever trap this is the point where you explain to the audience what it was, whether I fell for it or not.
You need to explain your logic, and the point you were trying to make.
If you don’t it looks like you are running away from your own failed ploy. What the hell was it about anyway? Just ROI? Time preference? Present value? I have no idea.
BTW, I’ll ask you one now Drew.
How do your examples relate to the failure of Long-Term Capital Management L.P.?
@john personna:
No, Jp. It’s not my job to educate the ignorant. If you don’t get it, those of us with a corporate finance and investment background know you are completely full of it. No traps. No tricks. Just basics. Absolute rock solid basics. You are floundering. May I humbly suggest you go read the first five chapters in a basic corporate finance book, and the chapters in an investment book concerning bases for valuation of financial assets. Until then, your comments on the subject at hand are just drivel. Just drivel. And really, is anyone surprised?
The last sentence in your post says it all. You have no idea. Gawd.
hey, nearly 4 yrs later- does obama own any part of our economy yet?
Hey Drew: lay out your argument. That’s how it’s done. If you cannot, or will not bother, then you’re useless to the conversation.
@Drew:
By the way, it occurs to me that I did actually answer the question:
And then I asked about risk. I might allocate to any or all of those investments, depending on risk, and other available alternatives. I mean, rational people now buy treasuries at negative real rates of return, because they think they should have them in their allocation, given the risk and exposure of their other investments.
Like Rob, I’m still interested in your logic. I woke up this morning with an open mind and at least half expected to find an explanation here today. I planed on reading it carefully, and maybe even learning something.
@bill:
Sure bill, the improvement 😉
@john personna: Also “risk” can be measured along different axes, so WTF is Drew talking about? I can think of two different risks right off the top of my head: alpha risk (risk of market in general going up and down) and beta risk (risk in comparison to average market value of stuff.) Then there’s currency risk, political risk, litigation risk…
There’s a whole set of risks that need to be evaluated and weighed in a portfolio, and you may want to place more emphasis on one type of risk than another, because you think it’s more important.
Portfolios don’t get analyzed just on the basis of “risk” because there ain’t no such animal. Aside from the different types of risk, there’s also investing in certain areas as long-term or short-term hedges. And what you want from your portfolio. Are you going to total long-term growth? Then you’ll have one set of strategies. Do you need a stream of cash from the portfolio in year N? Then you’ll have another set of strategies.
(P.S. Drew has “financial expertise” in the same way that I’m a rock star. Everyone’s Ron Johnson on the internets.)
@grumpy realist:
All true. I also like Taleb’s distinction between risk (something calculable) and uncertainty (something forever unknown).