A Silver Lining in Second Quarter GDP?

Last Friday the Bureau of Economic Analysis released its first look at GDP growth in the second quarter. BEA estimates that the economy grew at a moderate 2.4% annual pace in the quarter, notably slower than the 3.7% pace in the first quarter and the 5.0% pace in the fourth quarter of 2009 (both those figures were revised in this release).

As usual, I think it’s helpful to break down economic growth into its key components. The following chart illustrates how much various types of economic activity contributed to (or subtracted from) second quarter growth:

The chart illustrates the silver lining in an otherwise tepid GDP report: every major category of domestic demand expanded in the second quarter. Consumers, businesses, export markets, and governments all increased their purchases. That’s a good sign. Indeed, you have to go back more than five years, to the first quarter of 2005, for the last time that happened.

Investment showed particular strength. Business investment in equipment and software (E&S) grew at a 22% pace, thus adding about 1.4 percentage points to overall GDP growth. Boosted by the end (hopefully permanent) of the new homebuyer tax credit, housing investment grew at a bubble-like 28% pace (adding about 0.6 percentage points to GDP). And business investment in new structures recorded its first gain in two years

Despite solid growth in disposable incomes–up 4.4% adjusted for inflation–consumer spending grew at only a 1.6% pace.  As a result, the saving rate increased to 6.2%, compared with 5.5% in the first quarter.

And then there are imports. As I’ve discussed before, BEA calculates GDP by adding up all the components of demand for U.S. products–consumers, businesses, governments, and export markets–and then subtracting the portion of that demand that is supplied by imports. That means that any growth in imports appears as though it subtracts from overall economic growth.

That’s what happened in the second quarter. Imports grew at a brisk 29% pace, thus subtracting (using BEA’s accounting approach) 4.0 percentage points from overall growth. Which is why all those blue bars in the graph net out to only 2.4% growth in GDP.

I should hasten to add that this does not actually mean that imports are bad for growth. The big red bar is an accounting convention, not a measure of economic impact. Indeed, many imports are essential to our economy, at least in the foreseeable future (think oil for transportation and coffee for Starbucks).

I should also note that BEA’s calculation of contributions to GDP growth, which I graphed above, is subject to the same criticism that I’ve leveled at the claim that consumer spending is 70% of the economy. In a perfect world, an appropriate share of the imports (the red bar) would be netted against each of the components of demand (the blue bars). The result would be a graph of contributions that would truly illustrate how much each category of demand actually contributed to U.S. GDP growth. I will take a crack at that in the future.

9 thoughts on “A Silver Lining in Second Quarter GDP?”

  1. With regard to whether imports are bad for growth:

    As Don points out, some imports are necessary for growth. Others, however, are substitutes for internally produced items and slow the growth of employment, which ultimately reduces potential consumer spending and slows overall economic growth.

    Now, what would happen if economic stimulus, instead of being mostly essentially cash grants, was focused towards domestic spending and mainly helps our economy? Spending on construction projects is probably an example of this, and could perhaps be expanded to some sorts of “government as an employer of last resort” instead of some unemployment benefits. These sorts of things might expand the multiplier of stimulus dollars on the economy…

    I’m not sure how to expand this to the demand side… Obviously our trading partners would not be too happy if we suddenly established protectionist import duties or subsidies for domestic goods…

    I am thinking, however, that one point for a national sales tax is that it could theoretically give an additional tool for economic stimulus in addition to monetary policy and stimulus grants, both of which can be slow and not well directed. Decreases in a national sales tax could give a very quick boost to demand, both because it could be put into effect quickly and because it would provide incentive for immediate spending (rather than allowing savings, as a stimulus grant would). You wouldn’t see it kicking in six months after a recession is over…


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