The US economy took an unexpected beating in the first quarter, but made a big rebound in the second. Gross domestic product grew at an annualized rate of 4% in the spring, a welcome change from the newly-adjusted -2.1% contraction in Q1:
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 4.0 percent in the second quarter of 2014, according to the “advance” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP decreased 2.1 percent (revised).
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 (see the box on page 3 and “Comparisons of Revisions to GDP” on page 10). The “second” estimate for the second quarter, based on more complete data, will be released on August 28, 2014.
Just as the steep drop in Q1 seemed odd based on its internals, so does the big upside in today’s report. All the news looks pretty good, but not the kind of great that one would expect from 4% growth. For instance, real personal consumption expenditures — consumer spending — only jumped up 2.5% in Q2, and that had risen 1.2% in Q1, which was one of the puzzles of the awful GDP number last quarter. Services only grew 0.7%, less than the 1.3% in Q1. Real final sales of domestic product, which factors out inventory growth, increased 2.3% after falling one percent in Q1. That’s not really spectacular growth; it’s more or less what we’ve experienced since the end of the Great Recession.
The big change from Q1 to Q2 was in exports. Exports in Q1 fell 9.2%, but jumped up 9.5% in Q2, a sign of strength — or perhaps just a sign of deferred sales from Q1. Imports also rose sharply (11.7% vs 2.2% in Q1), but that doesn’t get reflected in the PCE numbers. Real gross domestic purchases, which measures overall purchases that includes imports, rose 4.5%, but a significant portion of that seems to be inventory growth, which accounts for 1.66 points of the GDP number in Q2.
Nevertheless, it’s a lot better than a -2.1%, and the Associated Press was impressed:
Last quarter’s rebound was broad-based, with consumers, businesses, the housing industry and state and local governments all combining to fuel growth. The robust expansion will reinforce analysts’ view that the economy’s momentum is extending into the second half of the year, when they forecast an annual growth rate of around 3 percent. …
In the April-June quarter, business investment in new equipment jumped at a 7 percent rate after having fallen 1 percent in the first quarter. That setback had reflected the expiration of business tax breaks at the end of 2013. Those tax breaks led companies to boost equipment spending at the end of last year.
Businesses, optimistic about future demand, increased their stockpiling last quarter. The increase in inventories contributed two-fifths of the growth in the quarter after having subtracted 1 percentage point from first-quarter activity.
That only works if consumer spending picks back up. The PCE rate of 2.5% growth is decent but not spectacular, and stockpiling has been seen before in this recovery only to see discounting later to clear warehouses. Watch the real final sales of domestic product in the next couple of quarters to get a better sense of how well this gamble pays off.
ADP provided more good news on the economic front. Their estimation of private-sector hiring shows 218,000 jobs added in July, which is a step down from June’s 281K but still the fourth month in a row above 200K:
Private sector employment increased by 218,000 jobs from June to July according to the July ADP National Employment Report®. Broadly distributed to the public each month, free of charge, the ADP National Employment Report is produced by ADP®, a leading global provider of Human Capital Management (HCM) solutions, in collaboration with Moody’s Analytics. The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis.
Goods-producing employment rose by 16,000 jobs in July, down from 43,000 jobs gained in June. The construction industry added 12,000 jobs over the month, less than half last month’s gain. Meanwhile, manufacturing added 3,000 jobs in July, less than one-third the number of jobs added in June.
Service-providing employment rose by 202,000 jobs in July, down from 238,000 in June. TheADP National Employment Report indicates that professional/business services contributed 61,000 jobs in July, down from 79,000 in June. Expansion in trade/transportation/utilities grew by 52,000, down slightly from June’s 56,000. The 9,000 new jobs added in financial activities was down 25% from last month’s number.
“Although down from June, the July jobs number marks the fourth straight month of employment gains above 200,000,” said Carlos Rodriguez, president and chief executive officer of ADP.
The ADP report this year has proven to be a pretty good indicator of the BLS report, which is due on Friday. The figure itself is like the PCE figure in the GDP report — it’s decent but not spectacular, and not all that much different than what we’ve been seeing. The US economy needs to add 150K jobs to keep up with population growth, so the addition of 68,000 more jobs over that figure is not going to penetrate far into the millions of the chronically unemployed. We need sustained job growth in the 300K-400K range for a significant period to deal with that problem, and that’s not even addressing whether the jobs created are full time or part time.