American GDP figures show need for policy rethink

Reuters


(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Martin Hutchinson
NEW YORK, July 29 (Reuters Breakingviews) - While legislators are fiddling over the debt ceiling, the real U.S. economy is struggling to emerge from the Great Recession. Just look at Friday's GDP data, which show disappointing growth of 1.3 percent in the second quarter while revising first-quarter growth down sharply to 0.4 percent. This suggests the fiscal and monetary policies of recent years have proved unproductive, and that legislators and policymakers need to get serious --even a little bit radical.
To be sure, although second-quarter growth was lower than expected, the details were not too bad. Much of the anemic growth came from increases in fixed investment and an improvement in net exports, with only modest boosts from inventory growth and consumption and a negative contribution from government spending. Inflation was slightly below the first quarter, but overall continues to niggle (To be preoccupied with trifles or petty details). The personal savings rate improved somewhat, though at 5.1 percent it is still too low for long-term health.
The real bad news came in the annual revisions to previous years and quarters, released at the same time. These showed that the Great Recession was deeper than previously thought, with a 5.1 percent decline from peak quarter to trough quarter, and that we are still not out of it, with real second-quarter GDP 0.4 percent below 2007's fourth quarter. Real annualized first-half growth of only 0.8 percent is far below the economy's potential.
This overall sluggishness strengthens the view that fiscal and monetary policies since 2007 have been counterproductive. In particular the extra stimulus implemented in late 2010, with $600 billion of Fed securities purchases and a two percentage point cut in individuals' social security payments, appears to have been ineffective -- or even to have had the opposite effect to that intended, as real growth declined from 2.3 percent in the fourth quarter to 0.4 percent in the first.
What should be done? The policy emphasis since 2007 on short-term stimulants such as ultra-low interest rates and massive budget deficits needs to be reversed. Trade liberalization needs more attention, and the overall uncertainty caused by Washington political games must end. Job-creating small business deserves greater favor than larger institutions, and pruning shears should be taken to many newly mandated costs and regulations. It's time for grown-ups to take over. Will they please step forward?

CONTEXT NEWS
-- The "advance" estimate of second-quarter GDP showed a rise of an annualized 1.3 percent, while in the annual revisions published simultaneously first-quarter GDP growth was revised down to a 0.4 percent annual rate. Revisions also showed the recession of 2007-09 to have been deeper than previously believed, with a peak-to-trough quarterly GDP decline of 5.1 percent and real GDP in the second quarter of 2011 still 0.4 percent below its peak in the fourth quarter of 2007.
-- Non-residential fixed investment rose by an annualized 6.3 percent and contributed 0.61 percentage point to the quarter's growth while exports rose by 6 percent and contributed 0.81 percent. Inventory changes contributed 0.18 percentage point, federal government expenditures 0.18 percentage point and personal consumption expenditures only 0.07 percentage point. State and local government expenditures subtracted 0.41 percentage point.
-- The GDP deflator rose at a 2.4 percent rate in the quarter while the personal consumption expenditures deflator rose at a 3.1 percent annual rate. The personal savings rate rose from 4.9 percent in the first quarter to 5.1 percent.
-- Bureau of Economic Analysis GDP release: http://link.reuters.com/cut82s

((martin.hutchinson@thomsonreuters.com))
(Editing by Martin Langfield)

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Gdp Deflator
A price index used to assess whether there has been a real rise or fall in gross domestic product (GDP) from one year to another. GDP at current prices is divided by the GDP deflator to obtain an index of GDP at base-year prices. A GDP deflator is based on a broader class of goods than the retail price index (RPI), since it needs to take account of the prices of investment goods and goods bought by the public sector as well as consumer goods prices.