In the second quarter of 2017, the nation’s economy grew at a faster pace than in the first quarter. According to the Bureau of Economic Analysis, real gross domestic product (GDP) increased at an annual rate of 2.6 percent in the second quarter of 2017. In the first quarter, GDP grew at an annual rate of 1.2 percent. The first quarter rate of growth was revised down from 1.4 percent. GDP has now increased for 13 consecutive quarters. However the rate of growth has varied over this time period.
Although the economy grew overall, residential production, as measured by Residential Fixed Investment, fell over the quarter. On a seasonally adjusted annual rate basis, RFI fell by 6.8 percent in the second quarter following an 11.1 percent increase in the first quarter. After consistent growth in RFI over 2014 and 2015, growth has been more volatile in recent years.
On an accounting basis, personal consumption expenditures (PCE) contributed 1.9 percentage points to the 2.6 percent growth rate overall. In contrast, PCE contributed 1.3 percentage points to the 1.2 percent growth in real GDP in the first quarter (implying that the net contribution of the other 3 categories was negative). The large contribution of PCE to overall GDP growth reflected in part the 2.8 percent growth in PCE over the second quarter of 2017. At the same time, PCE accounted for 69.1 percent of total real GDP. In the first quarter, PCE accounted for 69.2 percent of total GDP, but grew by a slower 1.9 percent over the quarter.
Each of the other major categories also contributed to overall GDP growth. In contrast, at least one category subtracted from growth in both the fourth quarter of 2016 and the first quarter of 2017. In the fourth quarter of 2016, net exports, the difference between exports and imports, subtracted 1.6 percentage points from growth, possibly reflecting the increase in U.S. interest rates. In the first quarter of 2017, the change in private inventories accounted for gross private domestic investment’s subtraction from overall growth while federal government expenditures accounted for the subtraction to growth by government consumption expenditures.
Despite the improvement in economic growth, the estimate of the change in the price index for PCE slowed over the second quarter of 2017. This is the FOMC’s preferred measure of inflation. An economic relationship known as Okun’s Law, describes an inverse relationship between economic growth and the unemployment rate, predicting that economic growth will lower the unemployment rate. Additionally, the Phillips Curve predicts that declines in the unemployment rate should correlate with higher inflation. While sustained economic growth and a lower unemployment rate have been observed, inflation has not consistently met the FOMC’s target rate of 2.0 percent*. A previous post discussed expectations for lower inflation as one reason why current inflation is below the FOMC’s target rate.
This is the first, or “advance”, estimate of economic performance over the second quarter of 2017. According to the release, “The Bureau emphasized that the second-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency.” Revisions to the underlying components of GDP can be sizable. For example, today’s release revised the contribution of PCE growth to first quarter economic growth from 0.75 percentage points to 1.32 percentage points while the contribution of gross private domestic investment fell from 0.60 percentage points to -0.20 percentage points.
* However, there was some acceleration in inflation over the fourth quarter of 2016 and first quarter of 2017. A previous post highlighted the impact of this acceleration on mortgage rates.