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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

How Good Was the GDP Report?



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The Bureau of Economic Analysis Wednesday released its first estimate of GDP growth in the second quarter this morning, and the headline number is great: They reported a whopping 4 percent increase in GDP, one broad indicator of the overall health of the U.S. economy. We’ve seen the economy grow, and even shrink, in fits and starts since the recession began (see the chart below), but with this large number making up for shrinkage in the first quarter, the economy seems to be growing at a steady, albeit slow, pace.

The BEA summarizes the major drivers of the growth this quarter:

This upturn in the percent change in real GDP primarily reflected upturns in private inventory investment and in exports, an acceleration in [consumer spending], an upturn in state and local government spending, an acceleration in nonresidential fixed investment, and an upturn in residential fixed investment that were partly offset by an acceleration in imports.

So here’s what’s going on: States and local government spending is increasing fast enough to give a noticeable boost to national GDP, making up for their reduced spending or slower spending growth over the previous few years (their budget constraints generally lag behind economic recoveries). Consumers and businesses are also spending more, especially on long-term investments — nonresidential fixed investment is things like manufacturing equipment and business buildings, while residential fixed investment is basically home construction and improvement. These are all solid signs.

But investment in inventories, which accounted for 40 percent of the quarter’s growth, may make the quarter’s numbers look better than they actually are, because businesses don’t keep increasing their inventories forever. As Wonkblog’s Matt O’Brien points out, inventory growth has seriously skewed GDP estimates to be much higher or lower than the underlying trend throughout the recovery, and the growth in inventories is often reversed the following quarter.

One notable category that didn’t really contribute to growth: health-care spending. Personal expenditures on health care grew at only a 0.7 percent annualized rate. With the Affordable Care Act having expanded insurance coverage in some noticeable way, it’s truly surprising that spending is still growing at a record slow pace. This quarter’s estimate could be a far cry from the actual number, though, because health-care spending is particularly challenging to measure. We saw last quarter’s health-care spending estimate revised down by more than ten percentage points, from almost 10 percent growth to negative territory.

The 4 percent growth rate comes amidst other good news like solid job growth, an uptick in the stock market, decreases in unemployment, and reports of increased consumer confidence — time will tell whether the good news keeps coming.



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