Don't Panic About the Economy

The GDP report for the second quarter has prompted much concern about the tepid 2.4 percent growth rate, but there are three other aspects of the report worth noting.

First, the bifurcated economy lives. The theme for the past year of recovery has been: a tale of two economies. Businesses that are connected to trade, to the global economy, and to business services are comparatively strong. The more global and less dependent on the United States you are, the better. We've seen excellent earnings from railroads, delivery companies, coal mining, and even automakers. But businesses and industries that are tethered exclusively to U.S. consumers, like the grocery chain Supervalu or housing, remain weak. This dichotomy is evident in the report. Personal consumption was flaccid. "Real personal consumption expenditures increased 1.6 percent in the second quarter, compared with an increase of 1.9 percent in the first." But business investment soared, and picked up steam from the strong first quarter. "Real nonresidential fixed investment increased 17.0 percent in the second quarter, compared with an increase of 7.8 percent in the first," the Commerce Department reported. Investments in equipment and software rose nearly 22 percent in the second quarter, after a 20.4 percent gain in the first quarter.

Second, even as fears grow of a double-dip recession, the report suggests that economic activity in the United States continues to expand at a decent clip. The growth rate for the first quarter of 2010 was revised sharply upward, from 2.7 percent to 3.7 percent. Assuming the preliminary report of a 2.4 percent growth rate for the second quarter sticks, it means the economy grew at a 3 percent rate in the first half—not fast enough, but nowhere near double-dip territory. The earnings report of UPS and railroad freight companies indicate that trade is surging. And the shape of that trade has the effect of dampening GDP growth. The BEA notes that imports "are a subtraction in the calculation of GDP." And imports surged in the second quarter, rising 28.8 percent from the first quarter. Through the first five months of 2010, imports are up 21 percent from the first five months of 2009 (here's the report) while exports are up more than 17 percent. In periods when imports fall sharply, that reduced activity has the effect of making GDP seem larger. In the first quarter of 2009, when imports fell 35 percent from the previous quarter, they "contributed" 6.48 percentage points to GDP growth. In the current quarter, soaring imports subtracted a whopping 4 percent from GDP growth. Reported GDP isn't rising as fast as we'd like in part because Americans are buying much more stuff from overseas than they were.

Third, this report proves that the past decade was even worse than we thought. It's common to hear concerns that the U.S. economy faces a Japan-style lost decade. But as I've documented, when it comes to employment, income growth, market performance, and fiscal management—we've already had a lost decade. The period between 2001 and 2008, characterized by easy fiscal and monetary policy, lax regulation, and low taxes on capital gains, dividends, and income produced pathetic results—and then ended in the worst debacle since the Great Depression. And the macroeconomic performance of our last decade turns out to be worse than we thought. In this release, the BEA revised growth figures for 2007, 2008, and 2009. In 2007, instead of growing 2.1 percent, the economy grew only 1.9 percent. In 2008, instead of growing 0.4 percent, it didn't grow at all. And in 2009, instead of shrinking 2.4 percent, it shrank by 2.6 percent.