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Real Gross Domestic Product Growth Disappoints Again

Second-Quarter Increase Below Expectations

By Chuck Ehmann | Thursday, August 18, 2016

Real U.S. gross domestic product (GDP) grew by just 1.2% in the second quarter of 2016, well below the expected estimate of 2.6%, according to the advance estimate released by the Bureau of Economic Analysis (BEA). First-quarter growth was revised downward to a paltry 0.8% from 1.1%. Coupled with the fourth-quarter 2015 annualized quarterly rate of 0.9%, real GDP growth experienced its worst three-quarter stretch of less than 2% since the last three quarters of 2012.

Personal consumption expenditures (PCE) and exports provided positive contributions to GDP last quarter, while private inventory investment, nonresidential and residential fixed investment, and state and local government spending subtracted from the total. PCE (or consumer spending) – which comprises roughly two-thirds of GDP – jumped 4.2% in the second quarter, led by strong gains in durable goods (+8.4%) and nondurable goods (+6.0%). Business investment fell sharply (-9.7%), with residential fixed investment (-6.1%) decreasing the most.

As seen in the following chart, annualized quarterly growth (the BEA method) also has been weak overall since the end of the Great Recession, averaging 2.1%. A comparison of the BEA method (blue line) to the simple annual percent change in real GDP (red line) shows both series below their performances during the previous economic growth period, with the annual change method averaging 1.8% since the third quarter of 2009. The BEA method tends to be more forward looking and predicts the movement in trends slightly ahead of the annual change method.

 

Both methods averaged about 2.6-2.7% annual growth from the fourth quarters of 2001-2007 and 3.6-3.8% during the economic expansion of the 1990s. Can the current “slow growth” expansion period be considered an anomaly, or is it the “new norm”? Certainly, numerous factors affect the growth in GDP and the U.S. economy.

What accounts for the reduced volatility in the real GDP measurements over time?

The previous chart reflects real GDP growth back to 1984, and it’s plain to see that the peaks and valleys during economic expansion years have narrowed in each succeeding expansion. This is more evident in the chart below, which graphs real GDP growth back to 1948.

The high and low variance in real GDP growth from its long-term average (3.5%) was about +13% to -13% before 1980. Since then, the peak variances are between -11% and +6% and have lessened to -4.7% to +1.8% since 2009. Part of the answer for lower volatility in real GDP growth is the increase over time in the size of the U.S. economy. In 1948, real GDP totaled about $2 trillion; today, it is more than $16.5 trillion. Another factor is the greater amount of fiscal and monetary regulations and controls, which can dampen large swings in the economy.

Whether the somewhat weaker growth in real GDP since the Great Recession is what we can expect from now on or just a function of a larger economy and/or sluggish performance, the variation in GDP growth will likely not see swings of greater than 10% anytime soon, as it did in prior expansions and recessions.

Chuck Ehmann

Chuck Ehmann

Real Estate Economist

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