4:52pm

Wed July 31, 2013
Economy

Better GDP Report Doesn't Mean Economy Is In Good Shape

Originally published on Wed July 31, 2013 6:05 pm

Transcript

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You could almost hear a collective sigh of relief today from economists. The government reported that the economy is not growing quite as slowly as had been expected and there are some positive signs on the jobs front. A private sector jobs report released today could mean the main government employment report on Friday will also show some strength.

But as NPR's John Ydstie tell us, just because the data are better than expected doesn't mean the U.S. economy is in good shape.

JOHN YDSTIE, BYLINE: Here's what passed for better than expected: an annualized growth rate of just 1.7 percent in April, May and June. Not great, says Ian Shepherdson, chief economist for Pantheon Macroeconomics.

IAN SHEPHERDSON: A 1.7 percent GDP growth rate is not a triumph. It was better than expected but expectations were very low.

YDSTIE: In fact, some forecasts had expected a growth rate below one percent. Healthy growth for the U.S. economy would in the two-and-a-half-percent to three percent range.

Among the positives in the report, business investment picked up, exports were higher, and the housing market continued its strong performance. One other component that helped push growth higher was businesses rebuilding their inventories.

But Diane Swonk, of Mesirow Financial, says if those inventories aren't absorbed by stronger consumer spending, it could mean slower growth in the coming months.

DIANE SWONK: So it sort of leaves you looking at the data, saying, well, you know, some things are better, some things are worse. On net, we're probably about where we were. And none of this changes where we are in terms of employment.

YDSTIE: Unemployment has been stalled recently around 7.6 percent and a growth rate of just 1.7 percent won't bring it down quickly.

Ian Shepherdson says the big thing holding back U.S. growth is the sequester, the across the board federal spending cuts that took effect in January.

SHEPHERDSON: I think the public spending cuts really are doing damage. And they'll do more damage in the second half of the year.

YDSTIE: Shepherdson says other challenges for the economy include weak consumer incomes and another potential damaging fight on the debt ceiling this fall.

SHEPHERDSON: What the U.S. really needs to turn the economy around completely is for Congress to stop doing crazy things and for the recovery in bank lending to business sector - which has been progressing very nicely - to continue and bring those small/medium sized businesses back into the game.

YDSTIE: Shepherdson says that, so far, the recovery has largely been restricted to large firms because banks were reluctant to lend to smaller ones. If that changes, he thinks smaller businesses will resume hiring.

Federal Reserve policymakers also weighed in on the economy today. After a two-day meeting, they issued a statement that was little different from the one following a meeting six weeks ago. There was no mention of Chairman Bernanke's timeline for dialing back the Fed's huge bond-buying stimulus. That timeline rattled the markets when it was unveiled in June.

Policymakers did downgrade their assessment of economic growth, from moderate to modest, suggested some concern about rising mortgage rates and noted that inflation is lower than they want it to be. But Shepherdson thinks the Fed is still on course to begin exiting its stimulus in September, as Bernanke has suggested.

SHEPHERDSON: The Fed seems to put much more emphasis on the labor market numbers than they do to growth or inflation. And so, bearing in mind that the payroll numbers have been revised up since the chairman made those remarks in June, I think that they're probably still on course to announce a tapering of their asset purchases beginning in September.

YDSTIE: Diane Swonk agrees.

SWONK: If they continue to see modest improvements in the labor market, they're going to be willing to lift their foot off the accelerator a little bit, but certainly not hit the brakes anytime soon.

YDSTIE: A report on job growth from the payroll firm ADP today showed private firms added 200,000 jobs in July. That bodes well for the government's jobs report on Friday. The stock market initially responded positively to today's news, but ended lower. In the bond market, long-term interest rates ended largely unchanged.

John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.