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New GDP Figures Show Recovery Not Yet on Solid Footing

August 27, 2010 at 12:35 PM

The bottom line from today’s Commerce Department report on gross domestic product (GDP) is that the economy is growing far too slowly to reduce unemployment and it is still too early to declare that the recovery is on solid footing.  The recovery could definitely use a boost from further stimulus.

The new report states that the economy expanded at just a 1.6 percent annual rate in the second quarter (April-June), less than the 2.4 percent rate the Commerce Department estimated for that quarter a month ago.

The downward revision to second-quarter growth largely reflects two facts:  businesses expanded inventories by a smaller amount than the Commerce Department originally estimated, and imports made up a larger share of total spending than originally estimated.  (Imports don’t count toward GDP, which measures the output of goods and services produced by labor and property located in the United States.)

As the chart below shows, the economy has been expanding for four consecutive quarters, but the growth rate has been slowing.  Growth has to be 2-2½ percent just to keep the unemployment rate from rising.  It has to be much faster than that to restore full employment.


In his Jackson Hole speech this morning, Federal Reserve Chairman Ben Bernanke acknowledged that “the pace of that growth recently appears somewhat less vigorous than we expected.” Bernanke pointed to actions the Fed has already taken to keep monetary policy highly supportive of an economic recovery and stated that the Fed stands ready to take further actions “as needed.”

Today’s GDP report suggests that the recovery needs a boost from further monetary — and fiscal — stimulus as soon as possible.

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