Low and slow
Growth slowed across most major categories. Personal consumption grew at a more laggardly pace in the second quarter relative to the first, net exports shifted back to a drag on the economy as import growth outpaced exports. And the government remained an economic albatross; the federal government has reduced its contribution to output for all of the past year, and state and local governments have been a drag for 11 consecutive quarters. Investment added more to growth than in the first quarter, thanks mostly to shifts in inventories. It was a weak report right the way through, though slightly better than markets expected. Nominal output rose at just a 3.1% annual pace in the second quarter, a very weak performance and down sharply from the 4.2% fourth-quarter rate.
The report should raise expectations for more Fed action at its meeting next week, not least since the key price gauges also showed significant weakness. The year-on-year change in the implicit price deflator for GDP and the PCE price index both slowed from the first quarter to the second and came in below 2%. Take disinflation across the quarter, which brought inflation rates below 2%, combine it with weak nominal output performance and a substantial slowdown in employment growth, and one has to give the Fed dismal marks, yet again.
But perhaps the more interesting perspective is the broader one. This morning's report included revisions to data going back to the end of 2008 (see chart at right). They reveal a slightly better performance in 2009; output fell less in the first half of the year and rose more in the second half, thanks mostly to stronger contributions from government spending and investment. But growth in 2010, at 2.4% for the year, was substantially worse than the initial 3.1% estimate, and the economy only barely avoided outright contraction early in 2011. All told, the trajectory of recovery has been flatter than initially reported; but for the last quarter of 2009 and the last quarter of 2011, when growth rose to 4%, output has expanded less than 3% every single quarter of the recovery and below 2% a full third of the time. Since the recovery began in the third quarter of 2009, the output gap has scarcely closed at all, falling from roughly $1 trillion to about $800 billion. Little wonder that unemployment remains well above its long-term rate.
The poor performance will open up additional room for criticism of President Obama by his Republican challenger, Mitt Romney. But even slow growth has typically been enough to carry incumbents to victory. And though it might not much bolster Mr Obama's argument, he can always point to performance in other large economies. Both Britain and the euro zone appear to be in recession, and emerging markets also seem to be slowing sharply. That, too, should encourage the Fed to do more—to shield the American economy from the ill winds blowing in from abroad.