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July 2010, Week 5

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Sat, 31 Jul 2010 12:02:50 -0400
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Slowing growth shows need for renewed policies to boost jobs
and incomes

by Josh Bivens

Economic Policy Institute
Research and Ideas for Shared Prosperity

July 30, 2010

http://www.epi.org/analysis_and_opinion/entry/slowing_growth_shows_need_for_renewed_policies_to_boost_jobs_and_incomes/

The Department of Commerce reported today that gross
domestic product (GDP) - the value of all final goods and
services produced in the United States - rose at an
annualized rate of 2.4% in the second quarter of 2010. This
is a steep drop off from the 3.7% annualized growth rate in
the previous quarter.

The sharp deceleration in growth was driven primarily by a
rapid rise in imports (which are a subtraction to GDP). Net
exports shaved 2.8% off of the quarter's annualized growth
rate, the largest bite lopsided trade flows has taken out of
growth in a quarter since 1982. A deceleration in the rate
of inventory accumulation and slightly slower growth in
consumer spending also contributed to the slowdown in growth
this quarter.

Trade, final sales and domestic demand

Final sales (a measure of GDP that strips out inventory
investments) continue to grow at a very weak pace - seeing
1.3% annualized growth in the second quarter and averaging
only 1.2% over the last four quarters (including the current
one). Domestic demand growth (final sales to domestic
purchasers) finally saw a good uptick in this quarter
(rising 4.1% after averaging growth of only 1.1% over the
previous nine months), yet much of this increased domestic
demand was satisfied by imports instead of domestically
produced goods.

Net exports look poised to be a serious drag on growth going
forward. After rising during the recession and providing a
welcome boost to growth in that period, net exports have
fallen in the past two quarters. Given that many of the
United States' major trading partners have already made
commitments to fiscal austerity that will harm their short-
term growth, this sector does not look poised to aid U.S.
growth in the coming years.

Investment Fixed investment, both residential and non-
residential, saw faster growth this quarter than previously,
a good sign for the economy. Government spending, both
federal and state/local, grew faster in the second quarter
of this year and both made positive contributions to overall
growth. Given that state and local spending had been a drag
on growth for the previous nine months, this was a welcome
change, albeit one that is hard to expect going forward
given the extreme budget constraints being faced by state
and local governments.

Personal savings and income The personal savings rate rose
to 6.2% in the quarter, up from 5.5% in the previous
quarter. This represents the second highest savings rate
since 1993 (and the highest occurred in the same quarter
last year). While a higher household savings rate could be a
good thing in the longer-run, a rising rate will, all else
equal, stunt consumer spending growth and other sources of
demand will have to provide a boost to the economy. And
there's no particular reason to be sure that this rate has
stabilized - savings rates well in excess of 7%
characterized the US economy for much of the post-war era.

Personal income minus transfer payments, a closely-watched
proxy for private-sector income growth, grew at its fastest
rate since 2006, rising at an annualized rate of 3.4% in
inflation- adjusted terms. Yet, this measure remains 5.3%
lower than in the last quarter of 2007 (i.e., immediately
before the recession).

Inflation A key measure of core inflation (the market-based
price index for personal consumption expenditures minus food
and energy) showed rapid deceleration. Since the second
quarter of the previous year it has risen by only 1.1%, the
second-lowest year-over-year change since data on this
series began being tracked in 1987. This very low rate of
core inflation is a clear signal that this remains an
economy starved for final demand for goods and services; as
long as this demand is lacking, economic growth that is
rapid enough to spur recovery in the job-market will be slow
in coming.

Where we've been, where we're going Despite the fact that
the economy has now seen four straight quarters of growth,
the level of gross domestic product today remains lower than
in the third quarter of 2007. If the average post-war path
of recovery following recessions had been followed, we would
now have an economy that was 7.7% larger than it was when
the recession began at the end of 2007. Instead, we have an
economy that is 1.1% smaller (see chart below). In short, we
have a long way to go before the economy can be declared
truly healthy. [Note: to view chart, go to website:
http://www.epi.org/analysis_and_opinion/entry/slowing_growth_shows_need_for_renewed_policies_to_boost_jobs_and_incomes/]

Lastly, it needs to be noted that this economic deceleration
is occurring even with the Recovery Act providing its last
strong boost to the U.S. economy. By the last quarter of
2010, the Recovery Act will no longer provide a boost to
growth. What will emerge to take up the slack of fading
Recovery Act spending is a troubling open question about the
economy going forward. It would be wise for policymakers to
provide more fiscal support to the economy, and soon.

(Kathryn Edwards provided research assistance)

Copyright c 2010 Economic Policy Institute.

[Josh Bivens joined the Economic Policy Institute in 2002.
He is the author of Everybody Wins Except for Most of Us:
What Economics Teaches About Globalization and has published
numerous articles in both academic and popular venues,
including USA Today, The Guardian, The American Prospect,
Challenge Magazine, and Worth. He is a frequent commentator
on economic issues for a variety of media outlets, including
NPR, CNN, CNBC, Reuters and the BBC.]

Economic Policy Institute
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Suite 300, East Tower
Washington, DC 20005-4707

(202) 775-8810 telephone
(202) 775-0819 fax 

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