For close to a decade, it appears the American economy has been stuck in neutral. Yes, it’s been free of recession. But it’s also been free of surging economic growth, despite near record highs in consumer confidence, growing corporate profits and continuing strength in the labor market.
The key indicator on the health of the U.S. economy is the Gross Domestic Product report, or GDP, released each month by the federal Department of Commerce. The report reflects on and revises data for the prior quarter. Simply stated, GDP represents the total dollar value of goods and services produced by the U.S. It consists of four components: personal consumption expenditures, business and residential investment, net exports and government purchases. Robust demand for goods and services by consumers and businesses is the heart of a strong and vibrant economy.
The latest GDP report shows the U.S. economy grew at an annualized rate of 2.6 percent in the second quarter. This was in-line with expectations and well above the first quarter’s anemic rate of 1.2 percent. After two consecutive quarters of declining growth, and a 2016 rate of just 1.5 percent, the turnaround was certainly welcomed. More importantly, the rebound was led by the American consumer, who for too long has remained on the sidelines. As the main driver of the U.S. economy, consumer spending accounts for nearly two-thirds of all U.S. economic activity. Personal consumption expenditures, consisting of household purchases of durable and non-durable goods and services, rose from 1.9 percent in the first quarter to 2.8 percent in the second quarter.
Despite this improvement in economic growth, and specifically, consumer spending, there are still concerns the economy is unable to kick into a higher gear. So why do the financial markets remain hesitant to commit to this rebound?
You see, what the markets truly seek is sustainability. In a healthy economy, the annual growth rate of GDP is around 3 percent. Even with the second quarter rebound, the rate of growth through the first half of the year was only 1.9 percent. For 2017, the Federal Reserve anticipates economic growth of just 2.2 percent. One can hardly consider this robust. Furthermore, the Fed’s target rate of inflation remains at 2.0 percent. Though consumer spending jumped during the second quarter, the Fed recently downgraded its 2017 inflation projections from 1.9 percent to 1.7 percent. Inflation is the year-over-year change in prices for goods and services. In moderation, it simply represents the requisite consumer demand for goods and services that propels the economy forward.
In the short-term, the Fed and the financial markets seem fated to a slow and steady, yet underwhelming, pace of economic growth. The U.S. is entering its ninth year of economic expansion, which started at the end of the 2007-2009 recession. It is the third longest expansion since World War II, but also the slowest, with average economic growth at 2.1 percent. And that’s where we currently find ourselves – an economy that is stuck around 2.0 percent annual growth.
What is wrong with the American economy simply plodding along with moderate economic growth? Well, at the heart of a globalized economy lies uncertainty. Good things can go bad and bad things can get worse. Employment, consumer spending, inflation, wage growth and other key drivers of economic stability are continually exposed to a wide range of domestic and global risks. The U.S. economy is a highly resilient entity. But the weaker the underlying economic growth, the less leeway there is to overcome the inevitable obstacles.
Yes, many are saying the second quarter rebound proves the dismal economic growth in the first quarter was just a temporary blip. But perhaps their argument belies the more important question - to what have we returned? A projected annual growth rate of only 2.2 percent? The same underwhelming 2 percent we’ve experienced the past 8 years; the slowest economic expansion since World War II?
In reality, the financial markets won’t commit to an increase in economic growth that has yet to prove its sustainability. Second quarter results were encouraging, but to achieve a higher growth rate requires momentum. Let’s just hope we don’t have to wait another decade to get there.