Four things to learn from new GDP data

From Friday's GDP report: Imports are surging. Jobs growth is slowing. Regulators may need to lighten their grip. Until November's midterm elections, politics will color economic reports.

In the first look at the nation’s economic performance between March and June, the Commerce Department reported the nation’s economic performance slowed from a brisk walk in the first three months of the year to a leisurely stroll this spring.

Gross Domestic Product, the output of all goods and services, grew at only a 2.4 percent annual pace compared to a revised 3.7 percent in the first quarter. But, inside the economic data are some trends that economists think are important in understanding what’s happening to the US economy:

Imports are surging. According to the Commerce Department, there was a 35 percent increase [[of imported of goods in the second quarter. Since consumer spending was relatively modest, most of those were capital goods purchased by businesses, says Joel Naroff of Naroff Economic Advisors in Holland, Pa.

Mr. Naroff says the big surge in imports illustrates one of the major structural shifts that has taken place in the US economy: so many domestic factories have been closed that even when economic activity perks up, businesses go abroad for their product instead of cranking up domestic production lines.

“The idea that you have job growth surge in the beginning of an economic recovery goes back to the industrial days when manufacturing shut down during downturns and then opened back up once business picked up,” says Naroff, who will testify before Congress on the economy on Tuesday. “That’s not the way the economy works these days.”

The flood of imports (not taking into account US exports) actually reduced GDP by 4 percentage points. In other words, if the US had not imported so many goods, the GDP would have grown at a 6.4 percent annual rate.

However, the US also increased exports by 1.2 percent. So, the net result on the economy was a reduction of 2.8 percent in the GDP by all the imports.

“The import numbers are an eye-opener,” says Naroff, who notes that the numbers are likely to be revised as more information comes in for subsequent GDP releases.

There are implications for a slower growth rate. One of the major implications of the report is that job growth is likely to be slower than anticipated in the months ahead. Slow demand means business can expand without adding new workers.

“We need to see economic growth on the order of 5 percent to 6 percent per quarter to help offset the loss of jobs in the last couple of years,” says Scott Brown, chief economist at Raymond James & Associates in St. Petersburg, Fla.

The slower growth rate also means state and local governments will not see a quick improvement in their budgets, says Mr. Brown. “They have some extremely tough choices to make on what taxes to impose and what services we have to have,” he says.

The slower economy may lead policy makers to look for additional ways to stimulate the economy.

“These numbers should have the Federal Reserve saying, ‘low interest rates have not done anything to boost sustainable economic growth,' ” says Fred Dickson, chief market strategist at D.A. Davidson in Lake Oswego, Ore.

In fact, on CNBC, James Bullard, president of the St. Louis Fed and an inflation hawk, said he thought the Fed might have to start planning for “deflation,” that is the dropping of the price of goods and services. Economists consider deflation to be detrimental to the economy.

Mr. Dickson says the tighter regulatory climate has resulted in banks’ increasing their reserves and subsequently reluctant to lend money. He argues the regulators need to loosen their grip slightly. “It’s a classic case of overreaction,” says Dickson.

Any economic report from now until November will have a political tinge.

Immediately after the economic report was issued, Republicans were issuing press releases proclaiming the Obama recovery was “stalling out.”

The Republicans used the slower growth to argue that now is not the time to raise taxes. And, the head of the Republican party quoted economist Mark Zandi of Moody’s as saying on PBS, “I would not allow those tax increases to take hold on January 1st either. I think the economy's still too fragile for that.”

Mr. Zandi says he did indeed make those remarks but adds that he actually thinks the current Bush-era tax rates should be made permanent for those who make under $250,000 a year. For those making more than that, higher tax rates should be phased-in starting in 2012, he argues.

“I would not take any chances with tax hikes until its clear unemployment is moving down,” says Zandi, who warns, “This is an important time – if we make a mistake and go back into a recession, we could be stuck there for a long painful period.”


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