July 31 2014

ReGrowth

Patrice J. Lee

Good news! The economy grew at 4 percent in the 2nd quarter of this year reversing the 2.1 percent shrinkage in the first quarter.

Yesterday, the Commerce Department announced that economic growth accelerated even stronger than the forecasted 3 percent. This was mainly driven by private sector activity: consumer spending and business inventories.

Americans are spending again at a pace of 2.5 percent on long-lasting manufactured goods like cars and furniture as well as on services. That could indicate we have more discretionary income to replace old washers and dryers and treat ourselves to manicures and pedicures.

Business investment, investment in home spending, and government spending also lifted growth.

What does all of this mean and why does it matter for regular Americans? It both reflects and inspires confidence in the economic recovery that has left many Americans behind. While the unemployment rate declined nearly each quarter, it’s because Americans workers are dropping out of the job market entirely rather than continue to fruitlessly look for employment.

Overall, Americans may feel more confident in the stability of their current jobs to open their wallets and spend on goods and services beyond basic food and shelter needs.

The Washington Post reports:

After suffering the sharpest contraction since the recession ended, the U.S. economy rebounded this spring, growing at a solid 4 percent annual rate, according to new government data released Wednesday.

Robust consumer spending helped drive the expansion during the second quarter, while businesses rebuilt their inventories... The growth rate beat analysts’ expectations and helped bolster hopes that the country’s long-simmering economic recovery is becoming self-sustaining.

New revisions to government data show the economy shrank at an annual rate of 2.1 percent in the first quarter.

The government's data revisions mean that the early years of the recovery were not as robust as previously thought, but also that momentum has built more rapidly. Annual growth in 2011 and 2012 was lower than had been reported, but the recovery picked up more steam in 2013. The government said Wednesday the economy grew 2.2 percent last year, up from its previous estimate of  1.9 percent.

The Federal Reserve has pointed to the housing market as an area of concern, with Fed chief Janet Yellen calling the sector’s performance “disappointing” during testimony on Capitol Hill earlier this month.

We do have to be cautiously optimistic. This four-percent growth figure may be revised down –or up once all of the numbers come in.  

Bloomberg Businessweek explains that measuring growth for the world’s largest economy is a big and complex task that takes years to fully develop. Revisions continue over time often getting smaller as years go by so for example, the 5.8 percent growth reported in 2002 under President George W. Bush has since been revised down to 3.7 percent.

Take note that the key drivers in this current growth spurt are not coming from the White House, Capitol Hill, or state houses but the private sector. In fact, government spending shrank last quarter. That’s an important reminder that policymakers can’t artificially stimulate economic growth by spending taxpayer dollars. A smarter strategy is to allow consumers and businesses to choose when, where and how to spend their resources and they will.

 

 

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