Here’s Whats Going Right and Wrong in the U.S. Economy
Seven years into the economic recovery and three months before a presidential election, how is the United States economy doing? Two reports released on Friday reveal the ways in which the economy is humming along brilliantly — and the things that are very worrying.
We’ll start with the good news.
G.D.P. Better Than It Looks
The big headline about second-quarter G.D.P. was that the economy grew at only 1.2 percent, far below the 2.5 percent that analysts had forecast. But the shortfall was almost entirely because of a contraction in business inventories, which generally doesn’t say a lot about the future.
If we look at “final sales,” G.D.P. excluding inventories, the economy grew at 2.4 percent, a nice rebound from the winter months and in line with forecasts. Final sales tends to be a better measure of the underlying rate of growth, while inventories swing around without reflecting any long-term trend.
Consumers Spending Money
The largest component of the economy, personal consumption expenditures, grew at a whopping 4.2 percent rate in the second quarter. That’s evidence that a long-awaited rise in consumer spending from an improving job market and cheaper fuel prices is finally materializing. Americans are feeling a bit richer, and showing up in stores, restaurants and auto dealer lots ready to spend. For the first six months of 2016, total retail sales were up 3.1 percent over the same period of 2015.
Wages Rising More Quickly
The other good news in Friday’s economic data involves wages. The employment cost index may not get as many headlines as G.D.P., but it is an important data set for understanding what employers are spending on employee pay and benefits.
The total number was up 0.6 percent in the second quarter and is up 2.3 percent over the previous year. But the details of the report are more interesting. The wages and salary component of compensation is now up 2.5 percent over the last year; that same reading was only 2 percent in the second quarter.
It’s just one number, but it points to this conclusion: Worker pay is not just rising; it’s also starting to rise at a faster pace. And it’s coming in the form of cash compensation, not being eaten up by health insurance and other employer-provided benefits.
So Americans are starting to see bigger paychecks, and are spending that money. What’s the bad news?
Things aren’t looking so great in the business sector. Investment in business structures, equipment and intellectual property fell for the third consecutive quarter.
A decline in investment in energy exploration, because of a drop in the price of oil and natural gas, appears to be a major part of that decline. A strong dollar is hammering American exporters, another squeeze to profits that businesses are facing as they pay higher wages.
The simple fact is that consumers are driving the economic train now, and businesses are pulling back. Eventually something will have to give — either businesses will have to increase investment to fulfill all that consumer demand, or weak business investment will translate into fewer jobs and weaker consumer spending.
And that isn’t altogether unrelated to the last, and most worrying, angle to pull out of Friday’s economic data.
Poor Productivity Growth
Over time, it is worker productivity that determines how rich a society will be: How much economic output can be created from an hour, or a day, of human labor?
This measure has been disappointing for several years, for reasons economists don’t entirely understand. But the latest data suggest it will turn out to be even worse than that in the first half of 2016.
The labor market, a downward blip in May aside, was quite strong through the first half of the year, with steady growth in the number of people working and the hours they put in. But according to the new G.D.P. numbers, the economy grew at only a 1 percent pace over the six-month span.
Yes, inventory numbers may not tell us much about the future of the economy, but they do mean that a big portion of the demand for goods in the economy was fulfilled by taking stuff off warehouse and store shelves, but not to be replaced by workers making more stuff. So in the calculus of productivity, the fact that G.D.P. growth is so low matters, despite the role of inventories.
Translation: Labor productivity fell 0.6 percent in the first quarter, according to previously released data. New data to be released next Tuesday will probably show a gloomy story.
What drives productivity is poorly understood, so it doesn’t lend itself to easy solutions. The Federal Reserve can’t magically flip a switch to increase productivity. But the new data is just the latest evidence that weak productivity growth is a grave threat to the United States’ long-term prosperity.