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GDP Picture, July 31, 2008

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July 31, 2008

Even with boost from stimulus, economy just limps along

by EPI economist L. Josh Bivens

U.S. gross domestic product (GDP) grew at a 1.9% annual rate in the second quarter of 2008, following growth of 0.9% in the first quarter of the year, according to a Commerce Department report released today.

While positive growth obviously is better than negative, the underlying trends in the working-age population and productivity mean that GDP growth of less than 2.5% is a recipe for job-loss, rising unemployment, and falling wages. For example, the 0.9% growth rate of the first quarter of this year was accompanied by the loss of 247,000 jobs, and the second quarter’s 1.9% growth was accompanied by a loss of another 191,000. Furthermore, wage growth for non-supervisory workers (80% of the private sector workforce) has lagged inflation in five of the first six months of this year.

Today’s report also included revisions to GDP going back three years, based on more complete source data. These revisions show that GDP actually shrank in the last quarter of 2007 (falling at a 0.2% annual rate). If anybody was taking comfort in the fact that quarterly GDP reports had yet to show negative growth, that solace is now gone.

In the second quarter, personal consumption spending, net exports, and government spending were the prime contributors to growth, while investment spending continued a sharp decline. Residential investment spending declined at a 15.6% annual rate in the quarter, but even this large decline may actually be a hopeful signal, as it represents the smallest decline in this sector in a year. More worrisome, though, is that equipment and software investment, which shrank slightly in the first quarter (down 0.6%), fell at a 3.4% annual rate in the second quarter, the largest decline since the first quarter of 2004.

While some of this quarter’s weak growth is due to falling inventories (which knocked 1.9 percentage points off of the quarter’s GDP), more fundamental weaknesses in the economy are clear. Domestic demand (final sales to U.S. residents) has grown less than 1% over the past year, its slowest pace since 1991.

The stimulus rebate checks gave a sharp boost to personal incomes, which rose (in inflation-adjusted terms) by an annual rate of 11.3% in the second quarter. This boost supported consumption spending (which contributed well over half of the total growth in the quarter) and also allowed the savings rate to rise sharply to 2.6%, up from 0.3% in the previous quarter. The boost to personal income and the rise in the savings rate will surely be transitory (the last rebate checks were mailed out July 11), and consumption will likely suffer in coming quarters.

Inflation outside of the food and energy sectors remains tame. The “market-based” measure of core consumption spending (excluding food and energy) rose by 1.9% over the past year, marking five straight quarters that this measure has clocked in at less than 2%.

While food and energy price increases squeeze families’ pocketbooks every bit as much as other kinds of inflation, rising prices in food and energy are driven by developments outside the influence of U.S. policy makers. The Federal Reserve, for example, should refrain from considering interest rate increases to fight rising prices unless inflation in food and energy begins to bleed over into the rest of the economy. This report gives no evidence that this has happened.

This most recent GDP report confirms that the U.S. economy remains unhealthy, but was boosted this quarter by the stimulus package passed earlier. It seems well past time for debate to have started over how to make another stimulus package even more effective. Without it, future GDP reports will be unlikely to surpass even the low bar set by this one.

To view archived editions of GDP PICTURE, click here.

The Economic Policy Institute GDP PICTURE is published quarterly upon release of the Commerce Department’s quarterly GDP report.

EPI offers same-day analysis of income, price, employment, and other economic data released by U.S. government agencies. For more information, contact EPI at 202-775-8810.


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