The BEA's first estimate of GDP growth for the second quarter (April - June) was a not-too-shabby 2.4%. Over half(1.3%) was from business investment in equipment and software. This is a huge change from the end of 2009, when business spending subtracted 2.4% from GDP.
Here's an interesting twist - imports of goods was 3.96%. Most of this was business imports, not consumer goods. This is a good sign for the economy. Companies purchase durable goods in the beginning of any recovery as they find they can't afford to make do with old equipment any longer.However, since it was imports, it is deducted from GDP. This is a normal part of the business cycle for an economy coming out of a recession. (Source: Bureau of Economic Analysis, Q2 GDP Report)
Here's another nugget buried in the data. Federal spending contributed .72% to economic growth, over half of which (.4%) was defense spending. This shows that, while the government can stimulate the economy with fiscal spending, it really can't drive replace business spending as a driver of economic growth. Even the $800 billion in military spending doesn't really contribute a whole lot to economic growth.
The BEA raised its estimate of economic growth in the first quarter (January - March) to 3.7% higher than even its first estimate (made in April) of 3.2%.
Oh, and while they were at it, the BEA revised all estimates of GDP growth from 2007 on. It does this every year around this time, because it gets new data. For example, the IRS supplied updated information about corporate taxes. For a history of all GDP reports since 2007, see GDP Current Statistics.
What It Means to You
A 2.4% growth rate means the economy is definitely out of recession and not in danger of a double-dip. So, you can safely ignore all those doom-and-gloom claims that the sky is falling. Actually, this type of Chicken Little panic is exactly what usually happens at the end of a downturn in the business cycle. Recessions are usually defined by two consecutive quarters of negative
Unemployment will continue to hover between 9-10%, however, since growth needs to be more than 3% for businesses to add jobs.
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Comments
Kimberly,
Business spending is indeed good news and implies greater growth and productivity in future periods. However, the slowdown and downward adjustment of growth forecasts suggest that some short-term and temporary stimulus might be needed to keep consumption on an even keel. It’s interesting to note that company revenues have been growing at slower rates than profits – indicating that profit growth is largely coming from cost reduction and this is largely based on cutting back on labor expenditures either through wage reductions or layoffs. Business spending addresses the supply side of the economy and is welcome. What needs a little support is the demand side. We have to sharpen BOTH blades of the scissors.
Jim