Q2 GDP growth was slow will Q3 be any better?

Output of the national economy in the second quarter (Q2) of the year grew at an inflation adjusted annualized pace of 1.3 percent. While the Q2 rise in GDP was an improvement over the 0.4 percent increase in Q1, the gain was the second weakest since the recovery began in mid-year 2009. Economists say a double dip is possible but not certain. Meanwhile, surveys of the general public find most people think a recession is already underway.
 

Second quarter (Q2) Gross Domestic Product (GDP) grew at an inflation adjusted annualized pace of 1.3 percent, according to the latest report from the U. S. Bureau of Economic Analysis (September 29, 2011).

This was the third estimate of Q2 economic growth in as many months and was a modest upward revision from the previous estimate that pegged the GDP increase at 1.0 percent.

While the Q2 rise in GDP was an improvement over the 0.4 percent increase in Q1, the gain was the second weakest since the recovery began in Q3 2009 (see Table 1). GDP growth in the past four quarters averaged 1.6 percent, approximately one half the average quarterly increase of 3.3 percent recorded (during good times and bad) over the 1957 - 2007 period.
 

Table 1: Annualized Real GDP Growth Rates by Quarter (%)

Components of GDP

Consumer activity is the single most important component of GDP. Personal consumption expenditures account for a steady 70 percent of U. S. output.

But the consumer backed away from spending on big ticket durables in Q2 of 2011. Outlays on durable goods decreased by 5.3 percent in Q2, the first decline since Q4 of 2009. As a result, personal consumption expenditures were up only 0.7 percent overall, compared to a 2.1 increase in Q1 (see Table 2).
 

Table 2: Percent Change in Components of Real GDP

Source: U.S. Bureau of Economic Analysis, Gross Domestic Product: Second Quarter 2011 (Third Estimate), September 29, 2011

Gross Private Domestic Investment was up by 6.4 percent in Q2, paced by spending on drilling and mining equipment and structures. A sluggish global economy contributed to slower growth in exports in Q2 (3.6 percent, compared to 7.9 percent in Q1). The Q2 increase in exports was the weakest since the recession ended in mid-year 2009. Government spending continued to be a drag on the economy, with negative growth for the third consecutive quarter.

Looking ahead to Q3

The advance estimate of Q3 growth in GDP is due to be released on October 27. The current consensus among economists who contribute to the national newsletter Blue Chip Economic Indicators calls for Q3 growth of 1.9 percent, an improvement over Q2. Analysts expect growth to be positive but slow in the quarters ahead.

The general public may see the economy differently. Confidence measures tracking the sentiments of consumers, small business owners, and executives are less than robust. A CNN poll (September 2) found 80 percent of those surveyed believe the economy is in a recession right now, and 35 percent said the recession was "serious."

A historical note suggests we should not discount the extreme gloom that pervades the public perception of the economy. In December of 2007, the prevailing consensus among private economists was that recession would be avoided, Q1 2008 growth in GDP would be a positive 1.4 percent, and GDP would improve each quarter after that. A Gallup Poll survey at that same time found only 20 percent of respondents described the economy as getting better.

Instead of behaving as economists expected, Q1 2008 GDP decreased by 1.8 percent and our deepest and longest post-war recession was underway.

Although most analysts are still treating the prospect of recession as a possibility rather than a certainty, it should be noted the probability has been increasing in recent months. The Blue Chip economists now put the odds of a recession by the end of 2012 at 33 percent, with the 10 least optimistic approaching a 50/50 chance of a double dip.