Good news? Second Quarter GDP grows 4%

Good news? Second Quarter GDP grows 4%

WASHINGTON, July 30, 2014 — GDP growth was 4% for the second quarter of 2014 according to The Bureau of Economic Analysis. This compares to a revised -2.1% growth in the first quarter.

Isn’t this finally some good news? Will this rate of growth continue for the remainder of the year?

The initial estimate of 4% growth will be revised four times before we know the actual number. The variation can be great. For instance in the first quarter of 2014 the estimates were -.1% then -1.0% then -2.9% and finally -2.1%. That’s a variation of almost 3%, meaning the first estimate of 4% for the second quarter could be revised substantially, likely downward, because inventory growth is just a “best guess” at this point. Of the 4% growth, inventory growth accounted for about 1.7%.

In addition, we should really look at the average for the first two quarters. In the first quarter the number was dragged down by very bad weather and a decrease in production of goods for inventories. The second quarter number was pulled up by consumption deferred in the first quarter due to weather and the rather large build-up of inventory. Taken together the economy probably grew at just over a 1% rate for the first half of the year.

How about GDP growth for the remainder of the year?

Most economists are forecasting growth will exceed 3% for the third and fourth quarters. That may be optimistic. Most cite the employment figures, in support of their growth estimates, because the economy has added in excess of 200,000 jobs in each month of this year.

The problem is that while there is a net gain in jobs, the economy lost full time jobs and gained part-time jobs. In June, for instance, there were almost 500,000 full-time jobs lost and about 790,000 part-time jobs gained, resulting in the reported almost 290,000 increase.

This means that the employment gains will not necessarily lead to growth in the economy.

The housing market is weakening and prices are falling. Mortgage rates have fallen because of the weak demand. While the hope is that the softer prices and lower rates will attract more buyers into the market, the reality is that with more part-time workers, there is not sufficient income for an individual to purchase a new home. Home sales will likely stay weak.

Both personal income and consumption expenditure are growing at a slow rate, meaning the consumer sector, which accounts for almost 70% of GDP, will not be able to fuel economic growth. In the government sector, the trend is still to hold the line on spending, so GDP won’t get help there. Business profits have been generally disappointing so far this year, especially in the retail sector, so business investment is also likely to stay low. There just doesn’t seem to be any sector ready to add growth to GDP.

The economy continues to be plagued by problems which limit growth. High taxes on corporate profits, over regulation of key industries and added cost burdens on business from laws like the Affordable Care Act, will continue to discourage companies from expanding. With the ease of receiving welfare and food stamp payments, individuals will continue to stay away from entering the workforce, so that the labor force participation rate continues to fall. The result is few new full-time jobs being created and fewer people seeking to contribute to the economy.

Since the recession ended GDP growth has averaged just over 2%. This is a horrible showing. For the five years after the 1981 recession ended GDP grew at almost a 5% rate. But the 2% growth rate will likely continue which keeps the rate just slightly ahead of population growth.

While we certainly welcome any good news about a growing economy, it is easy to see that one good quarter is not a trend. Until the government sets an environment where business has the ability and the incentive to grow, we will be mired in this low growth valley.

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