July 30, 2004
GDP Growth Comes Down to Earth
The consumer giveth and the consumer taketh away. That’s the big story in the eagerly anticipated second quarter snapshot of the national economy provided in the Bureau of Economic Analysis’s data release on Gross Domestic Product. After so many quarters of breathing life into an otherwise moribund economy, consumers put their feet up in the spring and early summer and let the other sectors do the heavy lifting.
As a result, the pace of growth in the overall economy slipped to a 3.0 percent annual rate in the second quarter, lower than some analysts had anticipated. In ordinary times, that news would still be welcome – indeed, the post-World War II average for economic growth in the national economy is just a few tenths of a percentage point higher than that mark. But in the rarified air of a fractious presidential election year, anything short of explosive growth is sure to be depicted as disappointing by some.
Consumers had their hands full just to keep from falling back in the second quarter. The big culprit was a spike in prices – led by increases in energy products – that sapped their purchasing power. The anemic 1.0 percent rise in consumer spending during the April – June period was the worst single quarter performance since the onset of the recession. Spending on both durables andnon-durable goods declined in inflation-corrected terms, and only a 2.3 percent rise in spending by consumers on services kept overall spending afloat.
If you’ve got a knack for numbers you can probably figure the rest of the report out. With two thirds of the economic pie struggling to grow at 1.0 percent, the other sectors had to turn in strong performances to produce GDP growth of 3.0 percent. And they certainly did. Business spendingenjoyed its fourth consecutive quarter of double digit growth, led by a strong rebound in spending on equipment and software, and a continued boom in residential housing. The weak dollar helped fuel an acceleration inexports, which galloped ahead at a 13.2 percent pace. And state and local government spending managed to grow for the first time in six months.
But the big story in the GDP release is sure to be the deceleration in the U.S. economy as we hit the mid-point of the year. That slowdown in growth – which is not a downturn in the economy itself – was magnified by the substantial revisions to the last three years of GDP data made by the BEA, which were released together with the preliminary second quarter information. The BEA figures now put first quarter growth at 4.5 percent, up from its older estimate of 3.9 percent.
As seen through the lens of the 1980’s, the pattern of growth depicted in the GDP release would seem to be bad news for the state of Indiana. Conventional wisdom told us that falling spending on durables like cars and appliances and high gasoline prices were a recipe for disaster here.
But as a political consultant recently opined, there’s not much wisdom in conventional wisdom these days. Indiana’s economy, like many other Midwest states, suffered some painful setbacks in a recession that saw healthy car sales and stable gas prices. We learned then, just as we will continue to learn in the months ahead, that spending by businesses on capital goods is every bit as important as the auto industry in keeping the lights on for the state economy. And in those corners of the economy, the news continues to be good.
Those who study recessions and recoveries know that consumer spending cannot run forever at the edge of the envelope. And in a second quarter where households took a breather from their spendthrift ways, it can only be said that the rest of the economy didn’t do too badly taking up the slack.
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