The Commerce Department announced today that GDP grew at an annual rate of 1.5 percent in the second quarter — in line with expectations. Notably, households drew back their spending: Personal consumption expenditures grew at a 1.5 percent rate compared with 2.4 percent in the first quarter. Business investment remained solid, contributing about half the measured growth, with a boost from inventory accumulation. Overall, the report is consistent with a pattern of household retrenchment and overall slowing growth.
What happens next? First, in light of the new data, the odds of the Fed undertaking additional quantitative easing are increased, and it could be as soon as the next meeting. Unfortunately, while the Fed can play defense and insulate the economy from adverse financial shocks, more extraordinary (though it has become ordinary) monetary policy will do little to affect the trajectory.
The bigger question is when the White House and Senate will put aside political posturing and get serious about a plan to avoid the fiscal cliff, providing comfort to businesses and international markets during the second half of 2012 and securing a bridge to the permanent tax and entitlement reforms that are a must-do item in 2013.