The U.S. Bureau of Economic Analysis released 2nd quarter data and it showed better than expected results. While many expected a significant improvement from the dismal 1st quarter, a growth of 4 percent in real GDP was larger than expected. Given their propensity to revise economic data at later dates, we should be cautious in relying on it. For instance, they again revised the economic contraction of last month from 2.9 percent to 2.1 percent. However, this is certainly evidence that the economy has rebounded from a terrible first quarter.
Some of this rise can be attributed to severe weather in the previous quarter where consumers stayed in, but started to make up for lost time by resuming their spending habits. This explained the healthy boost of 2.5 percent between April and June in consumer spending.
Business investment was also healthy. Gross private investment rose by 17 percent with most of the rise occurring with equipment. This is a significant improvement over the last quarter where investment declined by 6.9 percent. These figures are volatile, but we can take comfort that investment spending has risen in five of the last six quarters.
This improvement is consistent with my July 2nd post entitled, “Don’t Worry, Be Cautiously Happy”. The combination of an improving labor picture and rising manufacturing activity are boosting hopes of a more robust recovery. However, we are not out of the woods yet and should be concerned with the various world crises that can hamper U.S. economic growth in the future.
The U.S. Bureau of Economic Analysis provided yet another revision to their first quarter numbers. In a third revision, we now learned that the economy declined by 2.9 percent, as measured by real gross domestic product (real GDP). That would rate as the second sharpest decline during the Obama administration and that worse decline was when we were in the midst of a steep financial crisis in the first quarter of 2009 when the economy contracted by 5.4 percent. Even though that is a depressing rate, many analysts still believe that it will be a temporary bump.
Here are the three reasons why we should not worry:
- Weather was particularly bad across the U.S., so we should see a healthy rebound during second quarter.
- Job growth remains healthy with June private sector job growth estimated at 281,000, which would be the highest since November 2012.
- U.S. manufacturing continues its healthy trend in 2014 with its latest reading at 55.3. (Note: Any number above 50 represents expansion)
Take a deep breath and take comfort that the U.S. economy should rebound strong in the 2nd quarter. Having said that, our economic recovery remains relatively soft with the International Monetary Fund downgrading U.S. economic growth prospects for 2014 from 2.8 percent to 2 percent.
In a report from Wall Street Journal’s Real Time Economics, we learned that the west regions registered the highest level of economic growth in 2012. Increased demand from commodities from developing nations helped natural resource industries, so that is one reason why the western part of the U.S. did so well. In addition, the improvement in home prices resulted in increased activity in construction.
Here is the regional ranking from the U.S. Bureau of Economic Analysis:
- Southwest (4.1 percent)
- Far West (3.3 percent)
- Plains (2.7 percent)
- Great Lakes (2.2 percent)
- Southeast (2.1 percent) Tie for 5th
- Rocky Mountain (2.1 percent) Tie for 5th
- Mideast (1.5 percent)
- New England (1.2 percent)
Note: Alaska at 1.1 percent and Hawaii at 1.6 percent are well below the U.S. average of 2.5 percent. These percentages were calculated by averaging the state growth rates within each region. It is not weighted by population, though.
Of these regions, the Far West was the best because three of the four states (California, Oregon, and Washington experienced at least 3.5% growth) with only Nevada lagging below average at 1.5%. While the Southwest region is the highest at 4.1%, Texas skewed the average with a very high growth rate of 4.8%, but none of the other three states were above 2.6%. As for Texas, their wealth of natural resources and aggressive pro-business stance has helped their growth, but the question is whether it will be sustainable if a global slowdown will cool the demand for commodities or excessive population growth places a strain on public services.
The Plains, Great Lakes, Southeast, and Rocky Mountain regions are all near average. Of these regions, the Plains is the best performer and that’s also due to the wealth of natural resources that are present in North Dakota and Minnesota. North Dakota performed at a ridiculously high rate of 13.4%., with Minnesota recording a respectable 3.5%. Indiana of the Great Lakes stood out at 3.3% and this was mainly due to robust activity within their durable goods manufacturing industry. Tennessee and West Virginia were standouts in the Southeast with both registering a healthy 3.3% growth rate.
The Northeast is struggling the most with both New England and the Mideast growing at well-below average. Weather has probably taken a toll. This is not only due to poor weather disrupting economic activity, but a population exodus of Baby Boomers, who are retiring and seeking warmer climates. That results in an exodus of wealth that impacts consumer spending and investment opportunities.
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This Bloomberg report from Carlos Torres and Catalina Saraiva on April 12, 2013 highlights some good news about the U.S. economy. Despite gridlock and an increase in the payroll tax, consumer spending was quite resilient and they expect economic growth of 3% of real gross domestic product. Real gross domestic product measures economic activity with adjusting for inflation. If these estimates prove to be accurate, then that will be surprising news. However, the Bureau of Economic Analysis will release their first estimate on April 26th.
If this economic performance proves to be accurate and it can be sustained throughout the rest of the year, it will be a welcomed relief if the momentum of the first quarter extends through the rest of the year. What is often misunderstood is that actual economic performance is usually a result of past events. Due to a sustained recession and slow recovery, industry has been slow to build up capacity. That will soon change if they think that greater consumer demand will be sustainable.
There are two events that can explain why consumers are spending despite an increased tax burden and a sluggish labor market. First, housing is on the rebound with both home sales and prices rising. When people are buying homes, that leads to more spending with household appliances and new furniture is needed to fill up their space. This also enhances the wealth of those selling homes because they are receiving higher prices. Then there is strong performance of the stock market where its improved rate of return is boosting overall wealth. When their stock portfolio rises in value, then households are more opt to spend. Economists call this the wealth effect.
The quick improvement in growth prospects also speaks to the labor flexibility built within the U.S. economic system. While Americans certainly do not appreciate how firms are quick to fire workers when economic prospects take a turn for the worse, firms are also able to quickly reverse their actions when the economy brightens. This can be attributed to our economic system where it is less burdensome for firms to hire and fire workers. That is in contrast to Europe where worker protections make it harder for European companies to lay off workers. Even though it softens the blow during economic downturns, they are more reluctant to hire workers when an economic recovery starts to emerge. That is one of the reasons why the U.S. has been more resilient in recovering from the financial crisis than Europe.
We can draw some optimism from this news, but it is still premature to say that we are out of the woods. The impact of the sequester will not be fully felt until the second and third quarters of 2013. Then there’s the uncertainty from events in North Korea. However if the impact from those two events are less than expected, then we might see the U.S. economy perform above expectations.