U.S. GDP Growth Revised Down, Optimism Up

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September 14, 2016 by Harry Stoll

The U.S. economy expanded at a sluggish 1.1% pace in the 2nd quarter as businesses sharply reduced their stockpiles of inventory and spent less on new buildings and equipment according to the recently released U.S. Department of Commerce estimate of the 2nd quarter.  This 2nd estimate is slightly lower than the first estimate of 1.2% growth.  Since the first quarter saw a meager .8% advance in GDP, the U.S. economy has had only 1% growth in the first half of 2016.  Yet, most financial analysts predict faster growth in the second half of the year.  Their optimism is buoyed mainly by consumer spending trends signaled in the estimate.

In fact, consumers offset the corporate cutbacks in the 2nd quarter by spending at the fastest pace in six quarters, the U.S. Department of Commerce said.  Household consumption, the largest part of the economy, grew at a 4.4% annualized rate, the most consumption since the end of 2014. Purchases added 2.94 percentage points to GDP growth. This suggests steady job growth and modest pay gains are making Americans more confident and willing to spend.  “The only real area of strength was consumer spending,” David Sloan, senior economist at 4cast Inc. in New York said before the report was issued. At the same time, he forecasted, “The general view is that things are going to pick up in the third quarter.”

This consumer spending trend should encourage businesses to restock their warehouses and stores with more goods. New home construction should also help quicken growth in the 3rd quarter.  Sales and construction of new homes has been healthy in recent months.  In fact, new home sales jumped to their strongest pace in nine years this July according to several news reports I saw on television.

Additionally, despite the weak growth to date, businesses stepped up their hiring in June and July. Furthermore, there were signs in the 2nd quarter estimate that incomes are rising. The 2nd quarter estimate included a large upward revision to wage and salary data. Worker pay climbed to $92.6 billion, up $44.2 billion from the first estimate issued in July.

The U.S. economy is sluggishly moving along, but there are signals and trends that have given most economists a good reason to be optimistic for the second half of 2016. In fact, The Federal Reserve Bank of Atlanta currently forecasts growth will jump to a 3.4% annual pace in the July-September quarter.  That’s a healthy dose of optimism coming out of Atlanta.  Trends of increased consumer spending, higher wages, more hiring, more purchases, and increasing new home sales, are all positive signals for the U.S. economy.  These are good reasons for a healthy dose of optimism.

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