By Dr. Lynn Reaser
Friday’s release of second quarter GDP (gross domestic product) for the U.S. economy was on the weak side. The 2.4% real annualized growth rate from the prior quarter is not enough to reduce unemployment although revisions show that growth for the first half of the year averaged a respectable 3.1%.
Consumer spending and outlays by state and local governments displayed relatively soft gains. Households saw a sizable advance in their real after-tax earnings, but their caution was reflected in a saving rate climbing to a seven-year high of 6.2%. Budget strains limited state and local government spending, although these outlays rose for the first time in a year.
Other parts of the domestic U.S. economy were strong. Corporate spending surged with companies taking advantage of their improved profit and cash positions to invest in new computers, software, industrial machinery, and transportation equipment. They also continued to rebuild inventories. Meanwhile, federal outlays for various programs rose further, homebuilding rebounded, exports advanced, and even nonresidential construction moved higher.
Sales to U.S. and foreign customers were thus quite strong, substantially outpacing the growth of our production… Imports accounted for the gap, as foreign suppliers in recent years have borne a great share of declines in our total sales but also a larger share of the gains.
The U.S. economy should be able to grow at a pace averaging about 3% in real terms during this year’s second half, matching the first half pace. Financial turmoil in Europe appears to be easing, which should allay some of the recent anxiety. The biggest question now surrounds business confidence. Companies have been willing to invest in technology and new equipment but are still reluctant to ramp up staffing. Until employment begins to rise more consistently, consumer spending will be constrained.
Businesses need more clarity on what their health care costs will look like, how financial regulation will affect them, what energy policies will take effect, and what taxes will be imposed. They also need assurance that a plan for budget reduction is being put in place. These are tall orders, but without them, the outlook will remain cloudy and businesses could lose their appetite for driving the recovery.