Economic Indicators | Economic Growth

Sluggish GDP growth continues in second quarter

According to today’s data release from the Bureau of Economic Analysis (BEA), gross domestic product (GDP)—the broadest measure of the nation’s economic activity—grew at an annualized rate of 1.5 percent in the second quarter of 2012, a deceleration from the previous quarter’s 2.0 percent growth rate. This 1.75 percent average growth rate for the first six months of 2012 follows a year (2011) that saw average quarterly growth rates of just 2.0 percent. This makes 18 months where the economy has essentially grown well below the rate needed to put sustained downward pressure on unemployment rates.

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Contributions to growth in the second quarter came from personal consumption spending and fixed investment (which contributed 1.1 and 0.8 percentage points, respectively, to the overall growth rate). Within the broader investment category, nonresidential investment in equipment and software contributed positively to growth, as it generally has for the last three years. In fact, business investment is one of the healthier components of overall GDP. Increasing inventory investment added another 0.3 percentage points to overall growth.

Encouragingly, residential investment contributed modestly to growth (adding 0.2 percentage points) for the fifth straight quarter. While its contribution remains small, the fact that home construction is no longer contracting sharply (as it did for most of the period between 2006 and the first quarter of 2011) is a good sign.

Subtractions to growth came from net exports and government spending, which each subtracted 0.3 percentage points from the overall growth rate. The government contraction was dominated by state and local spending cutbacks—which saw their 11th straight quarter of spending declines.

The personal savings rate rose in the second quarter to 4.0 percent, up from 3.6 percent in the first quarter and its highest rate in a year. The savings rate, however, is still down significantly from its immediate peaks following the recession’s beginning.

Inflation remains tame. The year-over-year change in the “market-based” deflator for “core” personal consumption expenditures (i.e., excluding food and energy) was 1.9 percent, the third straight year it had registered a change of 2.0 percent or (often significantly) less.

The combination of weak GDP growth and extremely subdued inflation signals clearly that the economy would benefit from more support from policymakers.

Lastly, the BEA included revisions for the last three years of GDP statistics with today’s release. Growth for 2009 was revised slightly upwards while growth for 2010 was revised slightly downwards, and growth for 2011 was essentially unchanged. Some of the bigger adjustments made to the last three years of data were substantial downward revisions to corporate profits—for 2009 this reflected mostly reduced profits of financial corporations, but for 2010 and 2011 this reflected reduced profits of nonfinancial corporations. It should be noted, however, that these revisions were made to extraordinarily high profit performance reported previously. The profit margins for nonfinancial corporations in the second quarter of 2012 (even after the latest revisions) remained over 14 percent—which is a very healthy margin relative to performance in previous decades.

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