Today the Bureau of Economic Analysis (BEA) released the “second” estimate of real GDP growth for the second quarter of 2011. The second quarter estimate is based on more complete information than is available for the “advance” estimate. GDP growth was revised downward to a 1.0 percent seasonally adjusted annual rate, from the earlier estimate of 1.3 percent.
This is better than it sounds because while the rate of GDP growth was slower than first reported, the composition of growth improved. Personal consumption and nonresidential fixed investment grew faster and contributed more to GDP growth than reported earlier, while less growth was attributable to inventory investment. The slowdown in inventory accumulation actually subtracts from GDP growth, but the net result is that real final sales of domestic product (GDP less the change in private inventories) grew at the faster pace of 1.2 percent in the second quarter, instead of the 1.1 percent reported earlier. Total GDP growth was slower but more of it was consumption and investment and less of it was inventory accumulation.
That’s the good news. The bigger picture is that the economic recovery is fragile, with growth “improving” from a 0.4 percent pace in the first quarter to 1.0 percent in the second quarter. This weak pace of growth leaves the recovery vulnerable to additional shocks and does little to lower the persistently high unemployment rate. The traditional policy levers for stimulating growth are questionable. Federal Reserve Chairman Bernanke has indicated monetary policy is now practically locked in to accommodative mode through mid-2013, but the limits of additional accommodation may be coming into view. Meanwhile, the prospects for fiscal stimulus are clouded by a divided and deficit-fixated Congress. The policy prescription of short-term stimulus coupled with long-term entitlement reform seems nowhere in the current debate.
Our forecast is for grudging improvement through this year and next, before gaining robust recovery speed in 2013, but given current conditions all of the risk is to the downside.