After gross domestic product revisions, business spending shows growing confidence in the first half of the year. The first quarter spending was down 4.6 percent, with a decline driven by a 25.7 percent drop in spending on commercial structures. However, the second quarter posted a much better performance, with an annual growth rate of 4.6 percent. Spending on commercial buildings rose 6.8 percent. Businesses also increased their spending on information processing and transportation equipment by 11.4 percent and 5.5 percent, respectively. The new component of business spending—intellectual property products—rose 3.9 percent in the second quarter, boosted by software and R&D.
- With the exception of the strong housing market recovery, the broad U.S. economy continues to underperform. This week data on the GDP growth of 1.8 percent in the first quarter was uninspiring. The long-term historical average GDP growth is 3 percent. After a recession, GDP tends to grow even faster at 4 to 6 percent in order to compensate for the lost output during the recession. That has not been happening this time. After the harsh 2008-2009 Great Recession, this year will mark four consecutive years of subpar 2 percent GDP growth in the U.S.
- Housing is one bright spot. Residential construction rose at 14 percent in the latest data. Moreover, consumers are spending at a respectable pace thanks to the gains in the housing wealth. In all likelihood, without the housing market recovery the U.S. would be teetering on a recession.
- A quick review of the individual components of the economy (a fun exercise for those who took an Econ 101 course) shows that the prospects of economic growth remain in place:
- Consumer spending grew at a respectable 2.6 percent. With housing wealth rising and some jobs being added, consumer spending will continue to be at around 2 to 3 percent.
- Business investment spending grew at a 0.4 percent. Quite disappointing. But the prospect for growth is good because big companies have massive piles of cash and profits ready to be deployed. Big businesses, however, have been indicating less favorable business climate to spend that cash while small businesses start-up activity is still trending low.
- Government spending fell 4.8 percent. Sequestration is part of the story as well as the need to balance the budget by state and local governments. Though the government spending cuts are clearly a drag to the current economic growth, lower deficits can enhance future prospects for the economy. A case of short-term pain for long-term gain? The amount of spending cuts will steadily diminish in the upcoming months since many state and local governments are now running budget surplus.
- Net exports are not moving anywhere. Though the U.S. still imports more than it exports, there was no change in figure so the net exports had essentially no impact on overall GDP growth. The prospect for improvements in net exports looks good because of the energy renaissance in the U.S. Both oil and natural gas production have been rising in places like North Dakota and Pennsylvania and that will reduce the level of imports over time.
- The forecast is for GDP growth of 1.8 percent for all of 2013 and then picking up speed to 2.7 percent for all of 2014. That translates into about 2 million net new jobs this year and maybe 2.5 million next year.
- Note: while the U.S. is trying hard to grow at 3 percent (the historical average rate), China has been growing at 7 to 10 percent a year. If such a trend continues then China’s broad GDP will surpass America’s within 15 years.
- As a practical matter of China’s keen focus on economic growth, China invests twice as much money in Africa compared to the U.S. even though China’s current GDP is only half the size of the U.S. economy. China knows from its experience that the best way to lift people out of poverty is through economic growth. After Chairman Mao died with his brand of communism, growth policies of subsequent Chinese leaders led to over 500 million Chinese escaping poverty.
- Here are the NAR GDP forecast figures in detail. (PDF)
Based on early estimates, economic activity closed 2012 on a mixed note. Though gross domestic product grew at 2.2 percent for the whole year, the fourth quarter results were disappointing, showing a 0.1 percent decline. A large 22.2 percent cut in defense spending at the federal level (coming after a surprisingly high defense spending growth in the prior quarter) and a large negative change in private business inventories were key reasons for the mild contraction in the economy.