U.S. solid economic growth subdues recession alarm

Second quarter GDP swelled 3.3 percent at an annual rate, revised up from the 1.9 percent in previous reports, the Commerce Department said on Thursday. That came on the heels of 0.9 percent growth in the first quarter, meaning the economy grew at more than a 2 percent annual rate during the first half of the year.



U.S. stocks posted solid gains Thursday, with the major indexes surged more than 1 percent led a rally in financial, retailers, and oil refiners shares. The surprisingly strong U.S. growth reading was welcoming news released at a time when many economists thought it would shrink.

The upward revision to GDP was largely due to increased exports and larger inventory accumulation. The strength in the quarter was also fueled by stimulus checks that brought extra cash in consumers' wallets.

The economy still has to face challenges in the months ahead. Weak consumer fundamentals is expected in the second half of the year as the effects of federal stimulus checks fade, while export growth will probably cool as the global economy slows and the U.S. dollar strengthens.

Two consecutive quarterly declines in GDP is the popular definition of recession, though the National Bureau of Economic Research uses a more complicated gauge to make its official determination, usually several months after the fact.

Gross Domestic Income (GDI)

Although revised second quarter gross domestic product (GDP) figures suggest the U.S. is nowhere near a recession and may even have grown faster than its non-inflationary potential, gross domestic income (GDI) shows significant weakness. GDI advanced just 1.9 percent at an annual rate last quarter after contracting the two previous quarters. Thursday’s report is the first to show first quarter GDI in the red.

Gross domestic income is an alternate measure the Federal Reserve looks at. Fed officials have in the past highlighted GDI as perhaps a better measure than GDP. Fed paper released last year indicates that real-time GDI has done a substantially better job recognizing the start of the last several recessions than has real-time GDP.

Therefore, despite of GDP growth, the forecasts of a shrinking economy may not be so far off the mark after all.


GDP Vs. GDI

GDP is a consumption-based measure, adding up consumer, business and other spending and investment as well as net exports. GDI is income-based, adding up things like personal income and corporate profits. GDI is included in quarterly GDP report, but not in the first, or “advance,” estimate, so Thursday’s report was the first for second quarter GDI.

In theory, the two should equal each other, but they don’t always. In recent quarters, net exports seem to be the main reason, since they go directly into GDP but only indirectly into GDI. In addition, GDI more heavily reflects corporate profits than GDP does. Before-tax corporate profits grew slightly in the second quarter after falling the previous two quarters.