File photo: Shipping cranes and containers at a U.S. port representing exports and imports factored in overall gross domestic product, or GDP. (Photo: REUTERS)
The Commerce Department said on Friday that second-quarter growth as measured by gross domestic product (GDP) was revised up to a 3.9% annual pace. GDP was previously reported to have grown 3.7% in the April-June quarter.
Economists polled by Reuters had forecast second-quarter growth revisions to remain at its previous estimate. The change reflects a revised increase in consumer spending largely on healthcare, as the cost of premiums and other out-of-pocket expenses such as deductibles have risen in many states over 100%. Consumer spending, which accounts for more than two thirds of U.S. economic activity, was revised up to 3.6% from the initial 3.1% reported in August.
Revised spending on construction also helped to fuel the increase, with non-residential fixed investment growing by 4.1% in the second quarter. There was also a smaller accumulation of inventories than earlier reported, as inventories contributed just 0.02% to overall GDP growth rather than the 0.22% estimated last month.
The GDP report, which was released in the wake of a global stock market sell-off, is the first since the government “adjusted” their longstanding methodology. The change, which again came after first quarter contraction, marks the second time the government has changed the previously long-standing methodology. In July 2013, the U.S. government made a significant change in the gross investment number (I), which now includes research and development (R&D) spending, art, music, film royalties, books and theatre. In the entertainment industry, for instance, much of those numbers are expected projections, such as how much they believe a movie will make at the Box Office.
This change in the method to gauge GDP —or, rewriting the GDP number— was first implemented by the United States, and India was quick to express an interest. Yet, unlike the U.S., India has made a reasonable case for revising their long-plagued methodologies. In the U.S., changing the method to boost investment measures has no real benefit to the truth and no other purpose but to make “GDP growth happy,” as Bloomberg correctly critiqued. Let’s take a look at the government’s claims.
Despite the rosy economic picture the headline GDP paints, the Federal Reserve once again delayed their long-waited first interest rate hike since the Great Recession. While Fed Chair Janet Yellen said Thursday she and “most other” Fed policy makers “anticipate” raising interest rates at some point before the end of the year, the Federal Open Market Committee (FOMC) backed itself out of its self-imposed deadline because they needed more evidence of “further improvement in the labor market” and they were not “reasonably confident” inflation will move back to their 2% annual target.
It is a basic law of economics that inflation and wages rise when conditions reflect a truly tightening labor market, but they aren’t. As PPD reported, the labor market is a part-time animal with an abysmal civilian labor force participation rate. Even though the U.S. economy has technically regained all of the 8.8 million jobs lost during the financial crisis, the quality of the jobs created are low-skill, low-wage opportunities. Growth in higher-paying jobs, including those created in the manufacturing and energy sectors, continue to show considerable weakness.
The Commerce Department reported on Thursday that new orders for long-lasting manufactured durable goods fell 2% in August. The report comes after two closely-watched surveys of regional manufacturing activity indicated contraction last month. The Philadelphia Federal Reserve’s regional Manufacturing Business Outlook Survey for the mid-Atlantic tanked to -6 in September from 8.3 the month prior. The Fed’s reading came in far below economists’ expectations for a drop to positive 6.
The Philadelphia Fed’s report marked the second major regional manufacturing survey released this week showing the sector contracting, as the Empire State Manufacturing Survey outWednesday showed regional manufacturing activity contracted for a second straight month in September, remaining well below zero at -14.7.
