Compared to the first quarter, the second quarter's 1.3% growth suddenly doesn't look so bad. But it is quite weak, particularly in the context of recovery. Let's break down the quarter's growth into its component parts.
Americans didn't do much to boost growth last quarter. Personal consumption expenditures rose at an annualized rate of just $2.2 billion, which added less than 0.1% to the growth rate. Spending on goods actually fell, but spending on services rose by enough to provide a slightly positive net result. The decline in good was due entirely to fewer auto purchases and less gasoline consumption. In the context of rising gas prices last quarter, this makes perfect sense.
The most help to second quarter growth came from businesses spending more money. Their investment boosted GDP by about 0.9%. In particular, investment in equipment and software rose at an annualized rate of $15.2 billion. Additional inventory growth also helped a little. Firms even invested some money in new structures.
The same can't be said of consumers, however. Residential investment provided virtually no growth to GDP in the second quarter. The housing market investment rose by just $3 billion, on an annualized basis.
Trade also helped to boost growth last quarter. It increased GDP by 0.6%. Both exports and imports rose last quarter, but exports grew much faster than imports. At the annualized rate of $25.7 billion, export growth was the weakest in two years, however.
Finally, government spending cuts continued to make matters worse. Federal government expenditures actually increased modestly at an annualized rate of $5.7 billion, thanks entirely to defense spending and despite a decline in nondefense spending. But state and local government spending fell at the annualized rate of $12.5 billion. Overall, government spending cut GDP growth by about a quarter of a percentage point.
From today's report a few things are clear. First, the recovery is rockier than most economists thought. Few expected such a drastic revision to first quarter growth, and second quarter growth also came in below consensus estimates. In 2011, growth is averaging just 0.8%. That's pitiful in any context, but at a time when the U.S. desperately needs jobs, that level of weak growth clearly won't cut it. And remember, second quarter growth will be significantly revised twice more in as many months. It could very well end up having been even weaker than this report indicates.
Second, Washington needs to fix the current mess they've created with their debt ceiling bickering and focus on the economy. They need to destroy any barriers in the way of businesses eager to grow, like overly burdensome regulation and uncertainty. Although deficit reduction is important, whatever plan is agreed upon needs to be heavily back-loaded so that government cuts and/or higher taxes don't prevent the U.S. from expanding in the near-term.