U.S. GDP up just 1% in second quarter

Those determined to read only positive and uplifting economic news would be advised to avoid stories — including this one — about Friday’s (Aug. 26) second quarter revision of the U.S. gross domestic product.

The U.S. Bureau of Economic Analysis revised the second quarter GDP — the output of goods and services produced in the U.S. — downward to 1% from the earlier estimate of 1.3%. The revision follows a GDP increase in the first quarter of a relatively anemic 0.4%.

Unfortunately, the one number that was up was tied to inflation. The price index for gross domestic purchases during the second quarter rose 3.3%, but down slightly compared to a 4% increase during the first quarter.

Price increases may have slowed consumer spending. According to the BEA report, personal consumption expenditures rose 0.4%, down from 2.1% in the first quarter.

Exports of goods and services was up 3.1% in the second quarter, but trailed the 7.9% increase in the first quarter.

John Taylor, a financial analyst and senior vice president of John Taylor Financial-Sterne Agee, said the GDP numbers are not enough to solve unemployment problems.

“It is interesting that ‘we’ and the markets are relieved that it is still a whole number, not below 1%. If GDP growth doubles to 2% we will still not make a dent in the unemployment rate. Reminds me of a football team that plays not to lose rather than to win,” Taylor said Friday morning.

The markets didn’t like the GDP report, with several major indices beginning the morning in negative territory.

Federal Reserve Chairman Ben Bernanke issued a speech Friday morning in which he said the “growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years.” He said it will take time, but he is confident job growth rates will reflect what he considers stronger underlying fundamentals.

“In the interim, however, the challenges for U.S. economic policymakers are twofold: first, to help our economy further recover from the crisis and the ensuing recession, and second, to do so in a way that will allow the economy to realize its longer-term growth potential. Economic policies should be evaluated in light of both of those objectives,” according to the text of Bernanke’s speech.

Economist Jeff Collins — who produces The Compass Report for The City Wire and Benefit Bank — said the GDP rate was not a surprise. The unknown is what policy makers can do about the economy.

“Water is wet. It is only obvious the macro-economy is not performing well. What is less obvious is what will be the catalyst to push output growth back to trend? The core issue is jobs. Jobs depend on demand which is currently in short supply,” Collins said.

Greg Kaza, executive director of the Arkansas Policy Foundation, was more succinct when asked his thoughts on the GDP revision.

“Two-word summary: weak recovery,” Kaza noted in an e-mail interview.

Kaza provided the following points about the state of the economy.
• The economy remains in a weak recovery.  One example: payroll employment and industrial production have not recovered to their pre-recession (4Q-2007) levels.

• The economy is in a weak jobless recovery similar to the end of the last two recessions (1990-91, 2001).  Payroll employment is lower than in June 2009. Employment is now higher (131.19 million in July 2011) than at the end of the recession (130.493 million), expanding each month since last September. The growth, however, has been so weak that it has not significantly reduced the national unemployment rate.

• Industrial production, which measures the output of the nation’s factories, mines and utilities is also higher than at the end of the recession but lower than its pre-recession level.