US 2nd quarter growth

On Friday, the US reported 2nd quarter growth of 2.4% at an annualised rate, a little less than the expected 2.7%. This perceived ‘disappointing’ figure is in addition to other evidence of a slowing economy. Whether or not the report was quite as bad as some make it out to be, there are a couple of very valid negative points. The first is that the recovery is not as vigorous as previous recoveries, and the second is that the US still faces a huge output gap. This will intensify deflationary pressures increasing the similarities with Japan of the 1990s.

Looking at the detail, the figures are rather more encouraging. It is clear that consumption expenditure remains weak, growing at a rate of 1.6%. This is inevitable; one cannot expect the US consumer to be an engine of growth. Investment expenditure is recovering at a rate of 4%, led by equipment growing at 9%. That is the truly positive news. Much is made of the increase in the trade deficit. One needs to treat this with care. Exports are still growing rapidly; it is that imports have been growing even more rapidly. This is because industry has been restocking. The first phase of the recovery in 2009 saw inventories contributing to growth through the slightly bizarre fact of a slowdown in the rate of reduction in inventories. The first half of 2010 has seen actual inventory rebuilding met by an increase in imports. As long as the rest of the world continues to recover, it is likely that export growth will overtake import growth again such that the external sector will again be a net contributor to growth.

I believe it is a mistake to focus too much on the bad news in this GDP report. Whilst economic growth has slipped in the second quarter in the US and China has been aggressive in tightening policy, there is still enough growth momentum elsewhere to keep global growth intact.