Summing up Today’s GDP Data Release
Today’s report on gross domestic product (GDP)—the widest measure of economic activity—does not paint an encouraging picture of America’s past or present economic health.
First: the past. Today’s report provides revisions to GDP data going back three years. These revisions show slower growth over the past three years, meaning that the second half of the economic recovery following the Great Recession has been slower than previously thought. This slower growth was driven in part by government spending—federal, state, and local—that was even more austere than previously estimated. Additionally, the deceleration of key inflation measures (“core” personal consumption expenditure prices) over the past three years was more pronounced than previously thought. The revised data indicate that the recovery has been weaker than originally thought and, subsequently, that a fully healthy economy is farther away.
Now: the present. Growth in the second quarter of 2015 proceeded at a 2.3 percent annualized rate, following growth of 0.6 percent in the first quarter. While it’s a relief that the first quarter growth disaster wasn’t repeated, nobody really thought that was a big danger. But today’s data does indicate that there has been a slowdown relative to even the past couple of years, and, unless growth in the second half of the year accelerates markedly, it’s likely that 2015 will struggle to post even 2.0 percent growth overall.
In 2013 and 2014, the chief culprit for slow growth was anemic government spending. Along with the revisions of past data, today’s report also introduces a new and useful metric: final sales to private domestic purchasers. This is a measure of private domestic demand. In 2013 and 2014, this measure grew at an average rate of 3.1 percent, but in the first half of 2015, this measure of private demand has decelerated to 2.2 percent.
Additionally, the price data in this report indicates strongly that there remains a large demand shortfall in the US economy. The market-based price deflator for personal consumption expenditures excluding food and energy (thought by most to be the inflation measure most closely monitored by the Federal Reserve) rose only 1.1 percent compared to the same quarter a year ago—this is substantially below the Fed’s 2.0 percent price inflation target.
Finally, the revisions to GDP growth in the last three years will be accompanied later this month by downward revisions to already-slow measures of productivity growth. Between the downward price pressure indicating still-slack aggregate demand and the dismal productivity performance of recent years, the U.S. economy remains far from healthy. The first step policymakers should take to continue nurturing this economic health is to do no harm. Concretely, this means that the case for the Federal Reserve raising short-term interest rates in 2015 should be ignored absent a radical acceleration in growth rates.