The economy grew solidly in the second quarter, expanding at a 4.6 percent annualized rate. Business spending and residential investment from new home construction are leading the way. Such a fabulous growth rate, if it can be sustained, will mean fast-paced job creation and meaningful wage growth. Unfortunately, the latest pop in GDP looks to be an one-off event.
The quarterly GDP growth rates have been choppy and inconsistent. What looks to be impressive second quarter GDP growth is coming on the heels of a 2 percent contraction in the first quarter. Furthermore, the annual GDP growth rate has been subpar, at less than 3 percent (long-term historical average) for nine straight years. The uneven growth rate has therefore translated into about a $1.5 trillion shortfall in economic output versus economic potential. In other words, on average, every American would have $4,700 extra in their pocket today if GDP had been growing at the 3 percent historical average rate rather than at subpar rates.
The latest GDP figure was lifted by very strong growth rates in business spending (9.7 percent growth) and residential investment (8.8 percent). The all-important consumer spending component expanded at a more subdued 2.5 percent. International trade deteriorated a bit with imports rising faster than exports. Government spending was a drag due to on-going sequestration, falling 0.9 percent.
For upcoming quarters, the momentum is suggesting GDP growth of 3.3 percent in the third quarter and 2.8 percent in the fourth quarter. Such growth rates will mean about 2.5 million net new job creations over the 12-month period. Jobs in turn will be critical in supporting housing demand, as well as pushing up net absorption of commercial real estate spaces.
GDP growth has helped raise tax revenue. More jobs mean more people who are able to pay taxes. That is why the federal budget deficit has been shrinking. Some states are running a budget surplus.
GDP stands for Gross Domestic Product and intends to measure total production in a country. Interestingly, EU countries now want to modify the definition so that GDP figures get an additional boost. More specifically, they want to add to the economy the dollar volume from prostitution since money gets exchanged. This new methodology would make it easier to meet various EU countries’ fiscal budget targets. This new method, however, would appear nonsensical since romance between married and other committed couples would not be included since dollars are not being exchanged. Moreover, the most beautiful as well as the most woeful experiences, as Shakespeare would easily observe in people, are unrelated to money exchanges. Let’s hope government bureaucrats never try to tally up this emotional value of what humans feel.
Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.