Searching For Economic Growth: Latest GDP Revisions

by: John M. Mason


The latest revisions to the GDP numbers for the first quarter of 2016, put the annualized quarter-over-quarter growth rate at 1.1 percent, up from the initial 0.5 percent rate.

Year-over-year, however, the growth rate is only 2.1 percent, which is equal to the compound annual rate of growth of the US economy since the end of the Great Recession.

The good news is that US growth is stronger than most other areas of the developed world and we should be happy for that.

The latest revision of the GDP data for the first quarter of 2016 increased to 1.1 percent at a quarter-over-quarter annualized rate.

This is up from 0.8 percent in the first revised number, which was put out in May. And, this was up from the original estimate of 0.5 percent, which was published in April.

All good news, but…

An annualized 1.1 percent rate of growth is not all that spectacular.

Furthermore, the annualized, quarter-over-quarter rate of growth has been going down for one year now.

In the second quarter of 2015, the US economy grew at a 3.9 percent annualized rate, quarter-over-quarter. Then in the third quarter, the economy grew by only 2.0 percent. In the fourth quarter, the economy grew by 1.4 percent before dropping to 1.1 percent in the first quarter of 2016.

Seems like the first quarter revisions are good news because they were not as bad as first thought, but still part of a movement downwards in economic growth.

Year-over-year, the rate of growth of the economy came in at 2.1 percent, up from the earlier estimate of 2.0 percent, the level recorded in both the initial estimate and the first revision.

Note, that this year-over-year rate of increase was up from the fourth quarter of 2015, which came in at 2.0 percent, but was the same as the third quarter number of 2.1 percent. The second quarter of 2015 showed an increase of 2.7 percent, but this was down from the first quarter figure of 2.9 percent.

One other growth number to consider and that is the compound annual rate of economic growth since the end of the Great Recession. Since the second quarter of 2009, the US economy has grown at an annual compound rate of growth of 2.1 percent.

Whatever way you cut the numbers, economic growth in the United States remains moderate, somewhere around 2.0 percent.

There seem to be three major factors accounting for this slow pace of growth. First, real business investment has not been robust during this economic recovery. A reason given for this modest spending has been the uncertainty that has existed in both the national and world economies.

Second, there has been almost no improvement in labor productivity during the current economic recovery. This lack of improvement has been tied to the failure of the economy to use the resources available to it. The labor force participation has dropped to a forty-year low, matching numbers seen in the latter half of the 1970s. Furthermore, the use of physical capital in the manufacturing area has trended lower ever since the end of the 1960s.

These two factors capture the change in the technology used in business as more and more of both the human capital and the physical capital of the United States has become out-dated and are seen as less productive and, hence, less employable. This is a structural problem hindering growth.

Finally, the strong US dollar has also kept exports down and this, along with the weak oil prices hurting the energy sector, has slow-down economic growth, particularly in the past year.

Many economists had been hoping for a pickup in the second quarter growth numbers, but the industrial production numbers, which often parallel the GDP numbers have not been too promising.

Industrial production for May showed a year-over-year rate of decline of 1.4 percent, down from a negative growth of 1.2 percent in April. The only good news in these numbers is that they are less bad than the first quarter numbers that reported a decline of 1.6 percent, year-over-year.

The United States growth numbers are not that strong.

The good news is that the United States growth numbers are better than those of most everyone else.

The bad news in this fact is that it is contributing to a strong dollar, something that will tend to hurt US exports and, hence, US growth.

The strong US dollar is also making the job of the job of the Federal Reserve just that much more difficult. Although many analysts believe that the Fed has little ammunition left to help the US economy grow faster, the Fed is still facing the fact that the importance of the US dollar in the world is putting lots of pressure on it to manage the currency within all the turmoil created by Brexit, the difficulties of the eurozone, and so on….

So, it seems like the take-away from all this is, be happy that the United States is growing as rapidly as it is. It could be worse…a lot worse.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.