30 July 2014

US Economy Grows a Quarter of a Trillion - Now as Big as Europe's

You've likely heard by now that GDP grew by 4% in the 2nd Quarter. Here are some other intriguing things about the Commerce Department's 2nd Quarter Report that you may have missed.

GDP was up a quarter of a trillion, to $17.3 trillion*. To put that in perspective, the whole of the European Union - 28 countries that include Germany, the UK, and France - had GDP of $17.3 trillion in 2013. Our economy is roughly the size of Europe even though their population of 500 million is about two-thirds again our 300 million.

GDP grew even while the federal government shrunk. Nondefense spending dropped by 3.7%. This suggests that deficit estimates will be revised downwards again, as they have been throughout this recovery.

Exports grew 9.5%, indicating that the rest of the world is recovering as well. As the developed world expands, more consumers are "coming online," which is great news for American companies.

As a measure of how sustainable this economic recovery is, the savings rate rose to 5.3% even as consumption rose 2.5%. This expansion is not being fueled by easy credit and households taking on more debt in order to spend. (Or, as previously mentioned, a growth in government deficit.) Wealth is rising along with consumption.

The bad news is that the rise in personal income was mostly driven by increases in dividends. The growth in wages and salaries decelerated, suggesting that the labor market recovery still isn't putting upwards pressure on salaries. Not yet.

I predict that confidence in the economy will continue to go up but I don't think it will go up sharply until wages start to rise at the levels they were in the late 90s. The good news? That could happen within the next year.

* (Technically, its a little misleading to say GDP topped $17.3 trillion. In fact, the quarterly numbers mean that if GDP remained flat at this new level for three more quarters, GDP would equal $17,294.7 billion. For the first time it topped an annual rate of $17 trillion.)

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