When it comes to gross domestic product more than 1 percent is better than less than 1 percent, but that doesn’t make for a recovery. GDP for the second quarter was 1.7 percent, instead of the atrocious .8 percent economists had predicted. Still, 1.7 percent growth is a red flag.
American Enterprise Institute’s John Makin explains the three reasons why the 1.7 percent GDP figure is even weaker than it looks:
1. Inventories — unsold goods — contributed 0.41 percentage points. Final sales rose by just 1.29%. The inventory accumulation will be a drag on future growth.
2. Q1 ’13 growth was revised down from 1.8% to 1.1% (with final sales just 0.17% — virtually flat). The lower Q1 ’13 base (1.8 minus 1.1 equals 0.7) flattered the Q2 ’13 growth number by 0.7 percentage points.
3. Adjusting for inventories and revisions, the Q2 ’13 SAAR growth number was 0.59% adjusted Q2 ’13 growth (1.7 minus 0.41 for inventories minus 0.7 for Q1 revisions equals 0.59%).
He sees a negative growth quarter around the bend.
A Wall Street Journal report agrees that “in many ways today’s report actually makes the recovery look worse, at least in the recent past. Growth in the first quarter, which economists once hoped would top 3%, was revised down to 1.1% from 1.8%, and the government now says the economy barely grew at all at the end of 2012. The rosy view is that the economy’s growth rate has now picked up for two quarters in a row.” In short, growth is “building off a lower base than previously believed, and 1.7% is no one’s idea of rapid growth.”
It is even worse from an historical perspective. The recession technically ended in June, 2009. And four years later we are at less than 2 percent growth. (GDP for last year was revised up to 2.8 percent.) We’ve yet to see GDP growth numbers (over 7 percent in 1984) like those under Ronald Reagan.
Economist Doug Holtz-Eakin of the American Action Forum tells me, “The administration doesn’t understand that every decision has economic consequences.” What he sees now is no longer the hangover from the recession, but something much more akin to the “lost decade” in Japan. He cautions, “This administration does not have policies to address the structural problems that contribute to the low growth trend line.” From his standpoint, only a shift in tax, entitlements (“to help lift the burden of future debt”) and regulatory policy will get us out of the economic doldrums.
On this one I have to agree, “We should be horrified at 1.7 economic growth.”