At First Glance: Better-Than-Expected GDP Is Still Anemic

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The United States economy grew faster than expected in the second quarter of 2013. However, the overall level of economic activity remained anemic, as consumers limited spending to necessities, and the federal government continued to cut back as well.

The U.S. Commerce Department reported that 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 1.7 percent from April to June, after growing just 1.1 percent in the first three months of the year, and nearly coming to a halt at the end of 2012.

Given the lackluster growth in the previous two quarters, and the fact that economists had predicted growth to come in at just 0.9 percent, the advanced estimate of second quarter GDP was encouraging. Economic activity is also expected to speed up in the second half of the year.

“The focus is now on the second half of the year. Most expect the pace of activity to pick up over the final six months of 2013, though the magnitude of the acceleration is highly debated,” Royal Bank of Scotland economists told The Wall Street Journal before the report was released. Higher savings and the strengthening labor market are expected to be the engine of that growth.

While the economy gained some momentum, that gain was a struggle, thanks to January’s tax increase and March’s sweeping federal budget cuts, slow growth abroad, and political uncertainty here in the U.S.

But for Andre Bakhos, director of market analytics at Lek Securities, the growth was an indication that the economic recovery had begun to take root. “We have an upside surprise in the GDP, which speaks volumes for the job recovery that we’re putting together,” he told Reuters.

Higher taxes, implemented by lawmakers in Washington to help lower the government’s budget deficit, slowed consumer spending, which was a main reason why economic activity was lackluster last quarter. Consumer spending — which accounts for 70 percent of economic growth — dropped to a 1.8 percent growth rate in the second quarter, after rising at a 2.3 percent in the first quarter.

Comparatively, a rebound in business spending, growth in exports, and a smaller decrease in federal government spending gave a hand to the economy in the April through June period, and those positives partially offset the slowdown in consumer spending, the acceleration in imports, and the higher rate of inventory accumulation.

The consumer spending slowdown kept inflation pressures minimal. Personal consumption expenditures remained unchanged, while prices rose just 0.8 percent, excluding food and energy. Both of those readings were the lowest on record since the first quarter of 2009.

It was the third consecutive quarter where GDP growth fell below 2 percent, a pace that is usually considered to be too weak to bring down unemployment significantly. The unemployment rate came in at 7.5 percent in April, before rising to 7.6 percent in May, where it has remained. Still, payroll processor ADP reported that companies added 200,000 jobs in July.

In its report, the Commerce Department’s Bureau of Economic Analysis “emphasized that the second-quarter advance estimate released today is based on source data that are incomplete or subject to further revision.” A second estimate of GDP will be released at the end of next month.

The bureau has also made some changes to how it calculates GDP, which could help paint current economic growth in a better light. For example, research and development spending will now be treated as an investment. As a result of this change, economic growth was relatively stronger between 2009 and 2012 than previously calculated.

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