The first three months of 2014 were notable mostly for the cold, snowy weather that gripped much of the nation for an extended period of time, but they also marked one of the worst periods for the economy in some time. By the time the final estimate came out last month, the Commerce Department was reporting that Gross Domestic Product had shrunk nearly 3% in the first three months of the year. At the time, most analysts attributed the decline to the fact that the weather had slowed economic growth across the board, and the general consensus was that the Second Quarter would see a rebound from the downturn. As I noted at that time, there were signs in other economic data that tended to point in both directions on that point. Today, though, we got the first estimate of 2nd Quarter GDP and, at least for now, things look to be pretty good:
Real 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 4.0 percent in the second quarter of 2014, according to the “advance” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP decreased 2.1 percent (revised).
The Bureau emphasized that the second-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 3 and “Comparisons of Revisions to GDP” on page 10). The “second” estimate for the second quarter, based on more complete data, will be released on August 28, 2014.
The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, nonresidential fixed investment, state and local government spending, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.
Real GDP increased 4.0 percent in the second quarter, after decreasing 2.1 percent in the first. This upturn in the percent change in real GDP primarily reflected upturns in private inventory investment and in exports, an acceleration in PCE, an upturn in state and local government spending, an acceleration in nonresidential fixed investment, and an upturn in residential fixed investment that were partly offset by an acceleration in imports.
This is clearly a good number, and a welcome comeback from the downturn of the first three months of the year. However, it’s unclear how much of what we’re seeing here is a reflection of the actual state of the economy in the period between April and June and how much of it is a result of pent-up economic activity that was inactive during the first three months of the year due weather conditions. For example, exports jumped significantly between the first and second quarters, but much of that was likely due to the fact that shipping was significantly disrupted during the winter, especially in the Upper Midwest and the Northeast. If you look deeper into the numbers, you see that there aren’t a lot of differences between the numbers between the two quarters in the areas where you’d expect to see big differences if there was a real economic boom, most specifically in personal expenditures, which increased 2.5% in the second quarter after having also increased by 1.2% in the previous quarter. In other areas, growth was actually slower than it had been in the previous three months of the year. The service sector, for example, grew at .7% according to this report after having grown at 1.3% in the first quarter. To some extent, then, the numbers we’re seeing, assuming that they even hold up after the coming revisions in August and September, probably aren’t as good as they look on paper.
The New York Times’ Neil Irwin notes some other caveats about today’s report:
Of the 4 percent reported growth, 1.66 percentage points was attributable to businesses increasing their inventories. But when companies make more goods that end up on store shelves or in warehouses (and not because they’re selling more stuff), that doesn’t tell us much about the future of the economy. So economists often look at “final sales,” excluding inventory effects, to get a sense of the true underlying pace of growth.
It shows a much less volatile pattern over the last few quarters. By that measure, the first quarter was not quite so gloomy (with the economy shrinking at only a -0.9 percent rate) and the second quarter not nearly so sunny (that big 4 percent growth headline gets cut down to size, to 2.3 percent).
So inventories are a major part of the second-quarter story. But where else is the growth in G.D.P. coming from? For that, take a look at what different sectors contributed to overall growth.
Aside from inventories, the other major driver of expansion in the spring was from personal consumption expenditures. This accounts for around two-thirds of the economy, so it unsurprisingly accounted for the majority of economic growth.
Within personal consumption, the growth was broad, coming both from durable goods (like cars), nondurable goods (like clothing) and services (like health care). Meanwhile, business investment and housing investment were both positive but modest, and trade was a net subtracter from growth, as imports rose faster than exports. Government kicked in a small contribution to growth, as expansion in state and local spending made up for a contraction in federal spending.
By this measure, the expansion of the last few years looks a great deal more steady. The nation’s economic output has expanded by around 2 percent a year, with a high of 3.1 percent in the year that ended in the fourth quarter of 2013 and a low of 1.2 percent in the year that ended in the third quarter of 2011. The latest reading on the spring of this year is squarely within that range, with the expansion clocking in at 2.4 percent over the last 12 months.
That growth rate would be just fine in normal times, when the economy is humming along with full employment. But it’s disappointing given that the economy still appears to be functioning below its potential, with unemployment high and businesses still not producing at full capacity.
None of this is to dismiss the fact that today’s number is better than what we saw in the first quarter. Hopefully, it will hold up through the revision to come and into the third quarter. We’ll get at least some indication of that on Friday when the July Jobs Report is released. If previous months are any indication, we should see a solid net jobs number well above 200,000. It’s worth noting, though, that this month’s ADP number, which was released today, came in below estimates. As I’ve noted before, the correlation between the ADP report and the Labor Department’s can be hit and miss at times, however they do generally tend to follow the same trend lines. For the most part, though, the best we can say is that things look like they were better in the second quarter than they were in the first, but not so great that we can count on the fact that we’ve entered into a new era of much higher economic growth.
