Economy Still Growing Albeit at a Tepid Pace

Article excerpt

The U.S. economy continued to grow in the second quarter of 2012, but its growth remained lackluster. After increasing at a 2 percent annual rate in the first quarter, real (inflation-adjusted) GDP rose at an anemic 1.7 percent rate in the second. This slowdown affected labor markets. In the second quarter, job growth slowed considerably, and the unemployment rate began to inch upward after falling to a three-year low of 8.1 percent in April. But there are pockets of good news. Housing is on the mend, stock prices are rising, employment gains in July and August are tracking above their second-quarter average, and inflation is easing. On net, though, forecasters generally expect relatively weak real GDP growth and a stubbornly high unemployment rate to persist for the remainder of this year and into most of next year.

Reading the Tea Leaves

When attempting to gauge the direction of the economy over the next few quarters, economists often perform three assessments. First, is the economy's momentum slowing or accelerating? Second, how are current developments affecting this momentum, and how long might they persist? Finally, what are the risks to the outlook, that is, what could happen to produce either faster- or slower-than-expected growth or inflation?

Based on this exercise, what is the nearterm outlook for the economy?

Slo-mo

The economy's momentum has been fairly weak during this expansion. Since the beginning of the recovery in the third quarter of 2009, real GDP growth has averaged about 2.25 percent per quarter. The current expansion is the weakest during the post- World War II period. This performance is perhaps even more remarkable given the ultra-expansionary monetary and fiscal policies enacted over the past few years.

Extended periods of weakness raise questions about the economy's underlying growth. In response, businesses can become more reluctant to expand operations. Similarly, consumers become more cautious- a product of weak growth of real incomes and elevated uncertainty about future job prospects. A myriad of other effects occur. Loan demand becomes sluggish, and banks worry more about the creditworthiness of borrowers. Finally, government expenditures on income-transfer payments remain elevated and tax revenue lags, exacerbating government finances. Eventually, though, the economy will return to its natural (or underlying) rate of growth.1

Recent Developments

Ongoing developments in the economy can keep the economy growing either above or below its underlying trend. Over the past two years, Europe's sovereign debt crisis and, more recently, a sluggish Chinese economy have triggered considerable volatility in U. …