Behind the GDP Curtain: Boom or Gloom?
Business + Economy

Behind the GDP Curtain: Boom or Gloom?

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As the U.S. economy continues its slow and tortuous recovery, there is growing optimism about the economy, and yet some still sense weakness in the recovery. 

The good news: the unemployment rate dropped from over 8 percent two years ago to 6.1 percent last month. Private sector jobs have been increasing at a rate of about 200,000 a month, and wages have increased two percent over the last 12 months. 

The bad news: The labor participation rate is still too low at 62.8 percent and involuntary part-time workers increased to 7.5 million. Still, climbing out of the deep pit of the Great Recession has been an enormous economic challenge. Some think we could have done better; others think it could have been much worse. 

Related: 5 Reasons to Be Optimistic About Economic Growth

Tomorrow’s job numbers are expected to be above 200,000 for the sixth month in a row. These numbers come on the heels of a report by the Bureau of Economic Analysis showing that the U.S. economy grew by 4 percent in the last quarter—a significant jump from the 2.1 percent contraction during the first quarter of 2014.

Where is the economy headed now? Top economists discuss what they see behind the curtain. 

Robert Reich, professor of public policy at U.C. Berkeley and former Secretary of Labor under Clinton. 

“It’s impossible to make much of the growth number because the first quarter was so awful. The trend seems to be positive, but very slow. The employment number is hopeful, but here again we see huge variation from report to report. We'll need many more months before anything can be said about whether the jobs recovery is in full swing.” 

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Diane Swonk is chief economist at Mesirow Financial. She discussed the GDP revisions and jobs numbers in a Wednesday Mesirow Financial blog posting: “Almost all of the ‘unexpected rise’ in growth in the second quarter came in a sharp increase in inventory accumulation. The rise in inventories alone accounted for nearly 1.7 percent of the in 4 percent increase economic activity. Some of this reflects a catch-up in activity following harsh winter storms and a drawdown of inventories in the first quarter. The estimate is high, given underlying data we have on the quarter for inventory building, but it is admittedly more consistent with the upswing in employment and manufacturing activity that we have seen in recent months. If I were given the latitude to estimate on the high side when compiling this data, this is a place you could easily put what appears to be an economy that was growing more rapidly than the reported data were suggesting.” 

“Bottom Line: The benchmark revisions showed more growth than was initially reported for the first half of the year, which is encouraging and more in line with the improvement in employment. The sharp increase in inventories could be a bit worrisome if consumer spending and investment don’t pick up at a faster pace over the summer. The recent increases we have seen in employment, however, suggest that we will be able to maintain a 3% pace in the second half of the year, which will put growth on a fourth-quarter-to-fourth-quarter basis at about 1.8% pace, which isn’t great, but not a disaster given the disruptions we saw at the start of the year.” 

Related: Gallup Finds Stunning Drop in Economic Confidence 

Greg McBride, CFA, vice president and chief financial analyst for

“The Fed doesn’t want to rock the boat. The stock market has been hitting record highs this year. The bond market is having a rocking year. All the while, the Fed has been able to continue to taper their bond purchases…. That being said, I think there is some reassurance in the [Federal Reserve’s Wednesday FOMC statement] that the economy has continued to improve. The Fed did get the memo about inflation picking up. The Fed has been whistling past the graveyard of inflation, dismissing any and all concerns about it for months. There are a couple acknowledgements in this statement reflecting the fact that inflation has picked up. They clearly wanted to send a message that it hasn’t gone unnoticed.” 

“[Wednesday’s revised] GDP—which is going to get revised two more times, so don’t carve it in stone quite yet—is payback from the miserable first quarter. Inventories had to be rebuilt for items that couldn’t be delivered during a blizzard in Q1. The people that didn’t go traipsing through the car lots in mid-February with the wind chill at 15 below zero. When spring comes, guess what, they still need a new car. That purchase just took place in April, or May, or June, instead of February. At the end of the day, we are still a slow growth economy.” 

 “The labor market continues to improve. And while a lot of the new jobs are still part time, rather than full time, the quality of jobs that are being added has improved relative to the past couple of years. Instead of new jobs being dominated by retail, food and dining establishments, they are now business and professional establishments. The job market is getting better. The missing ingredient now is income growth. We are going to stay a slow growth economy until we start to see sustained growth in household income.” 

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Mark Zandi is chief economist of Moody’s Analytics. In mid-July, he issued the Moody's Analytics U.S. Macro Forecast: “While underlying productivity growth is not expected to regain the heady pace that prevailed prior to the recession, this will not be a near-term impediment to the U.S. recovery. Indeed, the more pedestrian productivity gains we anticipate will hasten the return to full employment. GDP growth is expected to accelerate through 2015, but so too will job growth, and full employment should be achieved by late 2016. If sustained, however, the productivity slowdown will eventually weigh on the growth of incomes, profits and living standards. Key to avoiding this is executing on currently stalled policy efforts to invest more in education and infrastructure and reform corporate taxes and immigration policy. Unfortunately, judging from the politics in Washington, a prudent planner wouldn’t count on much progress on these issues anytime soon.”

Jared Bernstein, senior fellow at the Center on Budget and Policy Priorities.

“The [GDP] revisions are minor and don’t change the underlying trend in the economy’s growth rate. The most notable revision was the change in the decline in the Q1 growth rate from around -3 percent to around -2 percent. Still an outlier, and still not very plausible, but a bit less striking. The only long-term predictions we can make [from the July ADP National Employment Report] is that the underlying growth rate in payroll employment is pretty solidly north of 200,000 per month, which is a decent clip, but still means it will be a long while until we get back to full employment.” 

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Dr. William Spriggs, chief economist at the AFL-CIO. 

“I believe [the revised GDP numbers] are more in line with the data from the labor market….  Disturbingly, the revisions reinforce the growth in inequality since the gains in income from interest and dividends is really among those in the top 1 percent, showing that this recovery has exacerbated an already high level of income inequality. The declining share of national income from wages should give pause to any notions of lowering corporate taxes, since that would mean shifting more burden on declining the declining wage share. And, it should renew discussions to address imbalances between wage and capital income, including strengthening collective bargaining and raising the minimum wage.

“The [July ADP National Employment Report] numbers are encouraging, since they continue the trend of May and June. If the Fed remains accommodative of growth and does not act to slow the recovery, and if the financial markets do not second guess the Fed and bid up interest rates, then these numbers would suggest the economy will continue to gain solid footing and the labor market might recover by 2016. So, we might start seeing wage gains.”  

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