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August 01, 2013

US 2nd Quarter GDP - Lackluster, But Better Than Expected

by Mil Arcega

The world’s largest economy grew only slightly in the second quarter, expanding at an annualized rate of 1.7 percent between April and June.  Despite the lackluster growth and a downward revision in U.S. gross domestic output in the first quarter, the GDP numbers were still better than some analysts expected.  But the data also suggest the economy is still not growing fast enough for the central bank to change course on monetary policies that have kept interest rates at record lows.
 
GDP - the broadest measure of the U.S. economy - confirms continuing slow but steady growth - led by better than expected consumer spending and a much improved housing market.  Economists say it shows an economy barely in recovery - but one resilient enough to absorb deep government spending cuts enacted by Congress earlier this year.

Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington, D.C., says the numbers took him by surprise.
 
"I’m really amazed at how well we’re doing given the sequester (government spending cuts) and the big tax increases we had this year.  Although I was predicting a year ago that if we could have avoided the sequester and the tax increases this year, we could have kicked that can down the road another year or two (postponed the spending cuts and tax increases) - that we might be growing over three percent, almost four percent this year," says Gagnon. 
 
The U.S. central bank has said as much, warning Congress that a continuing focus on government austerity could further slow the recovery.

Anthony Valeri, at LPL Financial, says weak growth in the first half of 2013 means the Federal Reserve, as the U.S. central bank is referred to, is unlikely to scale back too quickly on its easy money policies.
 
“I think [Federal Reserve Chairman Ben] Bernanke and company made it pretty clear that they are still very dovish (in favor of low interest rates). They are in no rush to remove accommodation (quantitative easing policy) and that they are in no rush, more importantly, to raise interest rates,” says Valeri.
 
The Federal Reserve has been purchasing $85 billion a month in bonds and mortgage-backed securities to keep long-term interest rates at record lows. Experts say ending the program too soon could stall the housing recovery. 

Economist Ken Simonson says that would hurt employment.
 
“Clearly, over time, more people would find they don’t qualify for a mortgage if rates do keep rising, so that could put a lid on (bring to a halt) how high home sales and home construction go.”
 
Economists expect more clarity on the U.S. economic picture when the monthly jobs report comes out August 2. Recent economic surveys suggest companies are still hiring, and that unemployment likely fell last month from 7.6 to 7.5 percent.