The Meh Recovery


Justin Wolfers thinks the latest GDP report is “less interesting for its accounting of the second quarter than for what it tells us about the future path of economic growth”:

At first blush, you might think that G.D.P. growth at an annual rate of 4.0 percent points to a brighter future. But in fact, these estimates are statistically noisy, and there’s no guarantee that strong growth today will translate into good outcomes tomorrow. Indeed, the historical relationship between the two is surprisingly weak. …  All told, these more meaningful data suggest that the economy is not in the middle of some whiplash, but rather that the past few quarters continue the pattern seen throughout the entire recovery, of persistent growth, albeit at a disappointing rate.

Jared Bernstein puts the report in context with the above chart:

The figure below plots quarterly annual growth rates against year-over-year rates for real GDP over the recovery. The annualized quarterly growth rate for Q2–the one getting all the headlines–was 4%; the more-indicative-of-actual-trend-year-over-year rate was 2.4%.

I see two clear points: first, the annual changes provide a much more reliable view of the underlying growth rate, and second, since the yearly rates turned positive in 2010Q1, we’ve been growing at trend, about 2.2% on average. That would be a fine place to be if we’d first made up the deep losses from the downturn. But what happened in this recovery is that we settled into trend growth before we bounced back and repaired the damage. That’s why the job market in particular has taken so long to recover.

Matt O’Brien deems the economy “meh”:

[I]nventories made up 1.66 of the 4 percentage points of growth this quarter. And that, unfortunately, won’t carry over into the future, since businesses won’t need to restock for awhile. In other words, once you account for inventories, the economy wasn’t really as weak as it seemed at the start of the year, and it’s not as strong as it does now. It’s just been the same the whole time: meh.

Suzy Khimm gathers some reaction:

Economists don’t expect the economy to continue growth at the same rate for the rest of the year, though some believe the picture has brightened somewhat. “This release provides evidence that the economy is healthy and will continue to grow at an above-average rate in the second half of this year and into 2015,” said Doug Handler, chief U.S. economist for IHS Global Insight.

“The story is the same—subpar growth during the first few years of the recovery. But 2014 is looking much better,” Stuart Hoffman and Gus Faucher of PNC Financial Services Group said in a statement. “After the very good second quarter growth should settle in at an above-trend 3.0% annual rate in the second half of this year.”

The Economic Policy Institute was more pessimistic. “Essentially, we made up some of the ground lost in the first three months of this year, but there’s nothing in today’s data to indicate that the economy is growing more strongly than it has for the past couple of years,” the group said in a statement.

Ben Casselman is relatively upbeat:

GDP reports are notoriously complex, and there’s always room for caveats and alternative interpretations. But make no mistake: This was a good report, especially in context. A 4 percent annual growth rate isn’t a boom, but it’s significantly better than the 3 percent economists had been expecting, and it more than offsets the first quarter’s contraction. The growth was broad-based, with consumers, businesses and even the government contributing to the rebound. Wednesday’s report provides strong evidence the first-quarter contraction was a one-off event that was probably due in part to the historically bad winter in much of the country: Consumer spending, homebuilding and exports all struggled in the first quarter and rebounded in the second. The revisions, too, were cause for optimism: The first quarter wasn’t quite as bad as it once looked, and the end of 2013 was stronger, suggesting the economy carried more momentum into the start of 2014 and lost less of it when winter weather hit. All of that gives hope for continued growth.

Ylan Mui finds that other “measures point to the growing strength of the recovery, as well”:

A private estimate of monthly job growth by human resources firm ADP released Wednesday morning showed 218,000 net new positions were created in July — slightly fewer than anticipated but still a healthy showing. Mark Zandi, chief economist of Moody’s Analytics, which helped calculate the data, said he expects the country to reach full employment by late 2016.

“At the current pace of job growth, unemployment will quickly decline,” he said. “Layoffs are still receding, and hiring and job openings are picking up.”

Government data show the number of people filing for unemployment benefits for the first time fell to its lowest level in eight years last week. A closely watched survey by The Conference Board showed consumers expressed more confidence in the economy in June than they have at any point since the recession began in late 2007.

Danielle Kurtzleben provides a better way of reading the GDP report:

[C]heck out this chart put together by ZeroHedge. It shows quarterly GDP growth, broken down by the various components that go into adding up GDP:


Take a look at each of those colors, and you’ll see that the green (changes in inventory investment) is the most all-over-the-map. Red (fixed investment) tends to be positive. Darker blue (consumer spending) also tends to be positive. Government spending (orange) can be up or down, but has in recent quarters tended to be modest in size and more often than not negative.

But inventories regularly swing up, then down, then up, then down, and the size change can be big. And it’s for this reason that there’s a better way to look at GDP each quarter. The BEA releases a figure called “real final sales,” and it simply looks at GDP without those swings in inventories. By that measure, GDP only fell at an annual rate of 1 percent (not 2.1 percent) in the first quarter, and grew by 2.3 percent (not 4.0 percent) in the second. Arguably, this is a more stable measure of GDP.