Since the end of the 2007-2009 recession, the U.S. economy has been underwhelming. With average annual economic growth of just 2.1 percent, it’s hard to imagine we are entering the ninth straight year of economic expansion.
Yes, the economy has had some minor gains, but what it truly lacks is sustained growth. The annual growth rate of a healthy economy is around 3.0 percent. Since the recession ended, the economy has had consecutive quarters of 3.0 percent growth or more only twice. The most recent was in 2014.
The latest data for Gross Domestic Product, or GDP, shows the economy grew at an annualized rate of 3.0 percent in the second quarter, reversing a recent slump in economic growth. In fact, the American economy hasn’t expanded at a 3.0 percent clip since the first quarter of 2015. GDP represents the total dollar value of goods and services produced in the U.S. It serves as the key indicator on the health of the American economy. The report, issued monthly by the U.S. Department of Commerce, reflects on and revises data for the prior quarter.
The 3.0 percent growth rate was better than expected and represents a sizable leap from the anemic 1.2 percent and 0.6 percent rates in the last two quarters. More importantly, the increase was attributed to the key driver of the U.S. economy – the American consumer.
Consumer spending, which consists of household purchases of durable and non-durable goods and services, accounts for more than two-thirds of all U.S. economic activity. It is the cornerstone of a robust economy. Yet, despite a high level of optimism on the state of the economy, Americans have been hesitant to spend. However, in the second quarter, consumer spending increased at an annual rate of 3.3 percent, the strongest pace in a year.
The economy was further driven by the renewed strength in business investment; the big-ticket purchases of equipment, buildings and intellectual property. Through 2015 and 2016, the average annual growth rate for these business purchases was a paltry 0.55 percent. But in the first half of this year business investments have surged by more than 7.0 percent.
Clearly, the latest GDP data serves as an indication of the economy’s untapped potential. But has the economic landscape actually changed to suggest this accelerated growth can continue?
The biggest conflicting signal on whether the economy has turned the corner is low inflation. With the accelerated expansion suggested in the latest GDP report, inflation should be rising, driven higher by the consumer demand for goods and services. Instead, inflation has been on a downward spiral this year. The Federal Reserve’s target rate of inflation remains at 2.0 percent. In July, inflation was just 1.4 percent, the lowest rate since December 2015.
Despite continued strength in the labor market, wage growth remains subdued. A tightening labor market should force employers to raise wages. However, wage growth has been stuck at a very tepid 2.5 percent the past few years, well below the 3.5-4.0 percent growth rate expected from a robust jobs market.
A deeper dive into the recent economic data brings focus to the U.S. Personal Savings Rate. Released each month by the U.S. Bureau of Economic Analysis, it reports the percentage of American’s disposable income set aside for saving or investment. The savings rate for Americans has currently fallen to 3.5 percent, the second lowest level since 2008. In October 2015, the rate was as high as 6.3 percent. The data suggests that Americans have offset the lack of wage growth by tapping their savings accounts to fund their purchases. This trend is unlikely to continue if wages remain stagnant, putting a halt to consumer spending and economic growth.
The recent GDP report certainly conveys a sense of optimism in the U.S. economic condition. Despite a strong jobs market, persistent low inflation and anemic wage growth continue to paint a muddled picture of the economy. The Fed is confident a sustained turnaround is forthcoming, but increasingly admits the timeline may be longer than once expected. Yes, the U.S. economy has yet to fully prove its bearing. But for now, the American consumers and businesses have given it a much-welcomed boost.