The Bureau of Economic Analysis produced its second-quarter report, and it will surprise a few of the doom-and-gloom crowd. While certainly not spectacular, it shows that the economy continues to grow, improving on a weak first quarter to bounce up to 1.9% growth. The revised forecast for 2007’s final quarter reveals a retreat:

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 1.9 percent in the second quarter of 2008 (that is, from the first quarter to the second quarter), according to advance estimates released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.9 percent. ….

The increase in real GDP in the second quarter primarily reflected positive contributions from
exports, personal consumption expenditures (PCE), nonresidential structures, federal government spending, and state and local government spending that were partly offset by negative contributions from private inventory investment, residential fixed investment, and equipment and software. Imports, which are a subtraction in the calculation of GDP, decreased.

The acceleration in real GDP growth in the second quarter primarily reflected a larger decrease in
imports, an acceleration in exports, a smaller decrease in residential fixed investment, and an
acceleration in PCE that were partly offset by a larger decrease in inventory investment.

The BEA will issue its final look at Q2 at the end of August.  They revised 2007Q4 downwards, showing it as the first quarter of negative GDP movement in at least four years.  The GDP had previously been rated as a positive 0.6%, but now has been calculated at -0.2%.  Overall GDP growth in 2007 went down a full point from 4.8% to 3.8%, still healthy but not as robust as earlier thought.

At the current rate, Q2 is the strongest quarter in the past three, showing growth despite a fuel-price crisis and a housing downturn.  Thanks to a weak dollar, exports increased and the fall in imports accelerated over Q1.  Housing continued to suffer but actually improved over Q1, and despite all of the talk of a recession in the air, consumer spending increased as well.

John McCain lost no time in pointing out how important free-trade policies have been in allowing the American economy to remain resilient through this turbulence:

“Today’s GDP data are a stark reminder of the importance of focusing on the conditions facing American workers and the policies that will get our economy back on track. While growth continues to be disappointing, trade provides one of the few bright spots in an otherwise gloomy economic picture, raising questions about Barack Obama’s policy of economic isolationism.

“The data announced today show that exports grew 9.2%. Absent strong growth in trade, the economy would have turned negative in the second quarter, contracting by 0.52% instead of growing 1.9%. Senator Obama will throw up trade barriers that would seriously hurt American workers, businesses and our economy. When 95% of the world’s consumers live outside our borders, it is crucial that we do everything we can to expand markets for American goods and level the playing field for American businesses and workers.”

It might behoove Republicans, including McCain, to remind voters that issuing hyperbolic, unrealistic statements about the American economy intends to panic Americans into bad policy.  The economy does not need a lot of top-down management, and in fact a great deal of what ails us now originates in government meddling, such as with Fannie Mae and Freddie Mac and mandates on lending practices.

Whatever else this economy might be, it’s not a recession, and it’s improving.