The United States returned to trend growth in the second quarter after a slow start to the year, but it leaves the world’s largest economy with the weakest first half expansion since 2011 and provides little indication that the country will break out of the pattern of sluggish activity that has prevailed since the financial crisis.
Gross domestic product expanded at a 2.3 percent annual pace in the second quarter and the rate in the first was revised higher to 0.6 percent from -0.2 percent, according to the Commerce Department in Washington today. Economists in Wall Street Journal survey had forecast 2.7 percent growth.
Today's 1.5 percent first half growth is slightly below the 1.9 percent first half average for the last three years. Second half growth in the same years has been 2.3 percent, with the best sustained expansion in the second and third quarters of last year at 4.5 percent.
New information from the Commerce Department, the so-called ‘annual revisions’, showed that economic growth in 2012 and 2013 was considerably less than originally recorded, with 2012 revised down to 1.3 percent from 1.6 percent and 2013 dropped to 2.5 percent from 3.1 percent. The GDP rate for the first quarter of 2014 was adjusted higher to -0.9 percent from -2.1 percent.
These revisions have reduced overall annual economic growth in the last three years, as in all the time since the end of the recession, to 2.1 percent, from its pre-revision average of 2.3 percent. This is the poorest record of any post-war economic recovery
Still, for the most important economic decision of the year, whether the Federal Reserve will finally abandon its zero interest rate policy, just matching the economic record of the past five years may be enough.
Fed Chair Janet Yellen has repeatedly stated that if the central bank’s economic projections hold, the FOMC will raise the Fed Funds rate sometime this year.
In yesterday’s FOMC statement a great deal of comment was elicited by one word-- some--which was added to the description of the type of improvement in the labor market enabling a Fed policy change.
Whether that means that a tempering of the 233,000 non-farm payrolls average of the past two years, is something that the Fed expects will have to wait for the event. But it seems clear the FOMC does not want the markets to read a weaker job report or two as a sign the Fed will not hike this year.
The Fed has steadily reduced its own projections for economic growth in 2015. At the March meeting the central bank expected GDP to expand at a 2.3-2.7 percent rate. In December that had been a 2.6-3.0 percent forecast. Last month that forecast was again reduced to 1.8-2.0 percent for the year.
To reach the Fed's 1.9 percent forecast for 2015 the U.S. economy would have to average a 2.4 percent expansion in the second half.
While the history of stronger U.S. second half growth is real, the 2.3 percent second half average of the last three years does not leave much margin for error. There are a number of economic headwinds, from China, to weak emerging market economies and plunging commodity prices, to large unsold American business inventories, that could depress U.S. economic growth in the months ahead.
If economic growth does not pick up in the second half of the year or falters, job creation, having been relatively robust for 24 months could begin to subside as employers look to utilize those new hires, rather than adding staff.
Today’s trend line GDP growth will provide little comfort to Janet Yellen and the FOMC.
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