The Bureau of Economic Analysis (BEA) released their first estimate of 2nd quarter Real GDP growth yesterday (7/30/14). Today’s post reviews an interesting change in the composition of what is contributing to the growth.
First, some definitions and clarifications:
1) GDP means Gross Domestic Product. GDP measures the total value of the goods and services that the nation produced in a quarter.
2) Real GDP is GDP growth after you subtract inflation.
3) The BEA releases a preliminary estimate of Real GDP growth one month after the quarter ends. The following month they issue a revised estimate based on additional information gathered. The following month, they issue the final result.
The composition of economic growth in the 2nd quarter was very interesting. Consumer spending has been the major driver of U.S. economic growth for all of the 21st century. The quarterly numbers vary but when you look at the data from the BEA, what you see is that consumer spending has consistently accounted for approximately 70% of the total Real GDP growth since the 2000’s began. In fact, consumer spending was the only positive source of growth for the 1st quarter of 2014.
Yesterday’s data showed a change in that pattern. Consumer spending only accounted for 42.25% of the total Real GDP growth, while business spending (i.e. Gross Private Domestic Investment) accounted for 64.25%. Yes, that totals to more than 100% because net exports (exports minus imports) was a negative 15.25% and government spending accounted for 8.75% of total Real GDP growth.
It is far too early to make any case that the composition of economic growth has changed and that business will now lead our economy. This is especially true since 64.6% of the 2nd quarter business spending was due to changes in inventory levels. This may simply be a rebound from the negative change in inventories last quarter.
It is also important to remember that 1st quarter GDP growth was distorted by weather factors and the composition of 2nd quarter Real GDP growth may also be distorted by how the different sectors of the economy rebounded from the 1st quarter.
It would be very encouraging if the U.S. was moving to a path of a better balance between consumer spending and business spending. You never want to have growth heavily dependent on one source and the U.S. economy has clearly been dependent on consumer spending. Unfortunately, one quarter does not make a trend, so further monitoring will be needed.
Steve Scranton is the Chief Investment Officer and Economist for Washington Trust Bank and is a CFA charter holder with over 30 years of investment experience with equities, tax-exempt and taxable fixed income securities. Steve actively participates on committees within the bank to help design strategies and policies related to client and bank owned investments. Steve also serves as the economist for the Bank and has been a featured speaker for both client and professional organization events throughout the Northwest.