A Tough GDP Report, But Look At The Big Picture by Polina Vlasenko, PhD, Senior Research Fellow – AIER
In the second quarter of 2016 the economy’s output, as measured by the Gross Domestic Product, grew at an annual rate of 1.2 percent, according to the advanced estimate released this morning by the Bureau of Economic Analysis. This is somewhat faster than the growth posted in the first quarter of the year, but still below the average growth seen in the previous two years, which exceeded 2 percent. The advanced estimate is based on preliminary and somewhat incomplete data, and will be revised in the coming months.
The growth during the second quarter was driven mostly by personal consumption expenditures, which grew 4.2 percent, and was held back by business investment, which shrunk 9.7 percent. Government spending has also shrunk by 0.9 percent.
In addition to the estimate for the second-quarter GDP, the bureau published revised GDP values for the past three years. This is done as part of the routine annual revision process: Every summer the bureau revises GDP estimates for the most recent years using the new and more complete data sources that may not have been available at the time the estimates were first published.
The revisions show slower GDP growth at the end of 2015 and the start of 2016 than was previously reported. But for other periods, such as late 2014 and early 2015, the revised GDP growth is faster. (See Chart 1).
Overall, the new, revised GDP level is higher than the previously reported one, even with the slower growth in recent quarters (see chart 2).
The upward revisions to the level of GDP came from several sources: higher personal consumption expenditures (mostly on durable goods) from 2013 to 2015; higher residential investment (spending on housing) during the same period; and higher business investment in 2013 and 2014. Overall, it seems that consumer spending, on both durable goods and housing, was higher in recent years than was previously reported.
A few years from now, when the next round of revisions takes place, we may yet learn that the slow GDP growth for 2016 reported today was, in fact, significantly faster (or considerably slower). The fact that economic data may get revised years later means that, when analyzing the economy, one should not rely on a single measure, such as GDP, from which to draw conclusions. Incorporating more data in the analysis is likely to make the conclusion more accurate, which is why AIER analyzes a large number of data series in its model of business cycle conditions. This supports our argument that the U.S. consumer appears strong, and has been supporting the bulk of the economic activity in recent years.