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the latest or ig i nat ion ANALYTICS Second-Quarter GDP Growth Beats Expectations By Mark Lieberman, Five Star Institute, Chief Economist S e c on da r y M a r k e t a na ly t ic s se r v ic i ng A preliminary report puts growth at 1.7 percent for the first full quarter since the sequester. T he nation's economy grew at a 1.7 percent annual rate in the second quarter, the Bureau of Economic Analysis (BEA) reported recently. Growth exceeded economist forecasts but remained slower than the growth rate needed to add jobs. In the first quarter, GDP grew 1.1 percent, and in the second quarter last year, the economy grew at a 1.2 percent annualized rate. Economists had expected the nation's GDP to improve at a 1.1 percent annualized rate in the second quarter. Along with the second-quarter report, the BEA issued revisions to GDP data back to 1929, which showed the average annual growth rate was 3.3 percent, 0.1 percent point faster than 50 | The M Report previously reported. With the BEA revisions, the nation's economy grew at an average rate of 1.8 percent from 2002 through 2012, compared with the 1.6 percent average annual growth previously reported for that period. BEA said the economy revised down the previously reported 1.8 percent growth rate for the first quarter to 1.1 percent. GDP is the sum of personal consumption expenditures, investment spending, government outlays, and net exports (exports and imports). The "formula" for GDP is generally expressed as C (consumer spending) plus I (investment) plus G (government) less X (exports less imports). If exports exceed imports, the "X" in the formula is positive. If imports exceed exports, it is a negative. Personal consumer spending, the largest component of the economy, grew at 1.8 percent from the first quarter, accounting for 1.2 percentage points of total growth. Investments, led by residential construction, accounted for 1.3 percentage points of growth. Residential fixed investment increased by 13.4 percent from the first quarter, the fourth consecutive quarter of double-digit percentage increases. Non-residential fixed investment on structures grew 6.8 percent in the second quarter after dropping 25.7 percent in the first. While exports grew 5.4 percent from the first quarter, imports increased 9.5 percent. Net exports were negative, subtracting 0.8 percent from total growth. The report showed government spending at all levels—federal, state and local— dropped 0.4 percent. Federal spending declined 1.5 percent—a 0.5 percent drop in defense spending and a 3.2 percent reduction in non-defense spending— while state and local spending grew 0.3 percent. Government spending for the quarter subtracted 0.08 percentage points from total growth. The report for the second quarter (April through June) was the first to reflect a full quarter of the federal government's sequestration, a mandatory acrossthe-board spending cut agreed to in the summer of 2011 by both the president and Congress in an attempt to force a balanced plan to reduce the federal deficit. Neither side thought the sequester of federal spending would actually go into effect. The quarter-over-quarter reduction in federal spending was the ninth in the last three years. In the nine quarters in which federal spending dropped, economic growth averaged 1.7 percent rate, while in the other three quarters the average growth rate was 3 percent. BEA issues three GDP report each quarter. The aforementioned report—coming less than a month after the second quarter ended— was the first of the three reports and uses estimates for data not yet compiled. The second was released at the end of last month; the third will roll out this month. BEA said while three months of "source data" were available for major components such as consumer spending, only two months of data were available for "most other key data sources." BEA filled in the gaps with assumptions including a decrease in nondurable manufacturing inventories, a decrease in non-motor-vehicle merchant wholesale and retail inventories, a decrease in exports, and a decrease in imports. Prices of goods and services purchased rose 0.3 percent in the second quarter after rising 1.2 percent in the first quarter. Excluding food and energy, prices increased 0.8 percent after increasing 1.4 percent.