July 30, 2004

Growth slows significantly in second quarter

 
Growth of U.S. gross domestic product (GDP) slowed to 3.0% in the second quarter of 2004, down from 4.5% in the first quarter, according to today’s report from the Bureau of Economic Analysis (BEA). A 3.0% growth rate is not sufficient to spur employment growth in an economy with productivity rising more than 5% in the past year (and on a long-term trend of around 3% growth). Further, a 3.0% growth rate is well below the 4.1% average that has characterized non-recession quarters since 1970.

Today’s release reflects the annual revisions in the national income and product accounts (NIPA), revisions that modestly change the NIPA numbers from the first quarter of 2001 forward. These revisions show that the 2001 recession was milder in terms of GDP losses than previously thought, but that the subsequent recovery has been slower as well. The revisions, on top of this quarter’s relatively weak numbers, render obsolete a recent claim made by political partisans that “since last summer, the economy has been growing at the fastest rate in 20 years.” 1

In addition to the slower growth reported by the BEA, today’s GDP release also included some key secondary findings:

• Personal consumption expenditures (PCE) led the deceleration in GDP, growing at 1%, compared to 4.1% growth in the first quarter of 2004. All of the growth in PCE in the second quarter was driven by services (up 2.3%) while both durable and nondurable goods consumption shrank (by 2.5% and 0.1%, respectively).
• Total investment grew slightly faster than the previous quarter (12.8% versus 12.3% in the first quarter). Investment in structures grew 5.2% after contracting 7.6% last quarter, and residential investment soared 15.4% compared to 5.0% last quarter. Investment in equipment and software ticked up to 10.0% from 8.0% in the first quarter.
• Exports (which add to GDP growth) grew at 13.2%, while imports (which subtract from GDP growth) grew 9.3%. However, because the level of imports is so much higher, the net contribution of the trade balance to GDP growth was negative, as it has been for 12 of the past 15 quarters.

Growth of wage and salary disbursements was essentially unchanged for the quarter as well, up $69.6 billion (or 1.3%), compared to a $72.1 billion (or 1.4%) increase in the first quarter. This continuing sluggish wage and salary growth raises questions about the recovery’s durability, especially as temporary stimuli (tax cuts and a wave of mortgage refinancing) that aided growth in the past begin to fade. PCE contributed a smaller share to this quarter’s growth than at any point since the recovery began, suggesting slow growth of wages and salaries should indeed be a concern.

The personal savings rate increased slightly in the second quarter, rising to 1.7% from 1.2% in the first quarter. A rising savings rate driven by consumers’ needs to repay accumulated debt could constitute a drag on PCE in the future relative to wage and salary growth, providing a further drag on the economy.

Inflation remained essentially steady in today’s GDP numbers, with prices rising 3.5% compared to a 3.4% increase last quarter. After subtracting food and energy prices, inflation rose 2.4%, roughly even with last quarter’s 2.5%. Fears about accelerating inflation that will draw interest rate increases from the Federal Reserve should be quieted by this report.

While the Fed raised interest rates a quarter of point at the end of June, further hikes would risk choking off growth just as the economy seems to be decelerating.   Given that the economy remains 1.8 million private-sector jobs below the March 2001 business cycle peak, this would mean cutting off the recovery before many of its potential beneficiaries saw any economic improvement at all. The notable deceleration in job growth in June will not be reversed unless GDP grows significantly faster than this latest release indicates.

—by EPI economist Josh Bivens

1.  Speech by President George W. Bush: http://www.whitehouse.gov/infocus/economy/

Between the third quarter of 2003 (summer) and the first quarter of 2004, GDP growth averaged just under 5.4%, faster than any period since the first to third quarter of 1984 (slightly ahead of a period from the second to the fourth quarter of 1999, which saw growth of 5.2%). These latest numbers, however, put the growth rate since the third quarter of 2003 at 4.8%, slightly slower than an equivalent period of time from the third quarter of 1999 to the second quarter of 2000 (4.9%).

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The Economic Policy Institute GDP PICTURE is published quarterly upon release of the Bureau of Economic Analysis’ quarterly GDP report.

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