So Far, a Slow Growth Economy

 Why is it “important to remember the economy shrank at a 0.6 percent rate in the first quarter.” Because . . . people are touting revisions putting the second quarter growth rate at 3.8 percent.

The Economy Grew at a 1.6 Percent Rate in the First Half

The overall growth for the first half was 1.6% according to Dean Baker CEPR. That does not mean the economy can not hit 3.6% with the help of some enormous leaps and bounds or some changes to how things are calculated and reported.

The economy grew 2.4 percent last year and the vast majority of forecasters expected growth at this rate to continue. 

“We do need to look at the two quarters together. Just as unusual factors were responsible for the fall in GDP we saw in the first quarter, they are also responsible for the strong growth reported for the second quarter. 

To take the most notable example, the lower trade deficit added 4.83 percentage points (PP) to growth in the second quarter. A pre-tariff surge in the trade deficit subtracted 4.63 PP from growth in the first quarter. Only a devoted Trumper would focus on the second quarter number without mentioning the first quarter jump in the trade deficit.

Moving beyond the irregular numbers, we get that non-residential fixed investment added 0.98 PP to growth in the second quarter after adding 1.24 PP in the first quarter. The first quarter growth was partly due to pre-tariff stockpiling but the second quarter growth on top of this indicates we are looking at something sort of real. This is the AI boom. If that turns into a bust, we will see this growth quickly reversed.

Consumption accounts for the bulk of GDP and here the story is pretty blah. The second quarter’s growth rate was a healthy 2.5 percent, accounting for 1.68 PP of the quarter’s growth. But this followed a growth rate of just 0.6 percent in the first quarter, leaving an average of rate of 1.6 percent for the first half. That’s not horrible, but certainly not great.

We also have seen evidence that the growth in consumption has been concentrated among higher income people who are spending their stock gains. That is consistent with my simple measure of looking at real spending at fast food restaurants. I consider this useful since it’s unlikely that rich people increase their consumption of fast food because their stock portfolio is worth more. 

And spending on fast food has to rank as largely a discretionary purchase. It is one thing that is relatively easy to cut back on if a family has to tighten its belts. Real spending at fast food restaurants was just 0.3 percent higher in the second quarter than the average for 2024. That doesn’t look like most people are feeling good about the economy.

Tomorrow, we will get new data on consumption for August, along with revisions for prior months’ data. Maybe that will show a different story, but for now, it looks like we have a weak economy that is being sustained by the AI boom. That boom could go on for a while and keep the economy moving forward, but it may not. ” 

I have not seen the new data yet, so maybe things have improved. As Dean points out, the economy for now remains sluggish. But! Back to Dean’s point, the administration would like to only emphasize half of the story! Some big egos stomping around the ether-net.