Just out today: the economy is still growing, although at a slower pace. The Gross Domestic Product for the 2nd quarter of 2012 increased at 1.3%, compared to the previous quarter which grew at 2.0%. It’s like driving down the interstate at 60 miles per hour and you enter construction zone and slow down to 35 miles per hour; you are still moving forward but at a slower speed. You have less momentum.
The chart below shows how GDP has changed since 2010, measuring growth for each three month period against the growth for the previous three month period. The news release today is the third estimate of GDP growth for the 2nd quarter GDP. The 2nd estimate of 2nd quarter GDP was a growth rate of 1.7%, meaning that the estimates were for a stronger economy but recent data is not proving that to be accurate. The first estimate of 2nd quarter GDP was a growth rate of 1.5%.
The economy is still growing but is losing momentum. The result is a whole host of actions on the part of businesses to adapt, which includes: hiring less, carrying less inventory, increasing accounts payable and expecting reduced accounts receivables. The result of less inventory carried by retailers causes less manufacturing which results in less labor utilized and less investment, which results in higher unemployment which brings reduced taxes to local government which leads to roads not being fixed, few raises for police and fire protection and reductions in university budgets. Businesses will reduce employees rapidly in expectation of a slowdown in order to reduce payroll costs so they can get their expenses in line with expected reduced revenues, but government will attempt to increase taxes and property assessments while maintaining their employment count because government has no profit incentive to ration their resources efficiently.
Positive contributions to GDP came from investment and exports, and negative contributions came from lower government spending, both state and local. Imports increased but since they are a deduction from GDP, were a negative factor. GDP is defined as the market value of goods and services produced by labor and property in the United States, regardless of nationality; GDP replaced gross national product (GNP) as the primary measure of U.S. production in 1991. The formula is:
GDP=Consumption + Investment + Government Spending – Imports
The next release on October 26th will be the first estimate of 3rd quarter GDP.