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Dazed and Confused

12:00 AM, Aug 2, 2014 • By IRWIN M. STELZER
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At last, some good news about the U.S. economy. Sort of. The government’s Bureau of Economic Analysis (BEA) reckons the economy grew at an annual rate of 4 percent in the second quarter of the year (data subject to revision). If that rate continues, five years of a lackadaisical recovery would be replaced by a growth rate more consistent with past recoveries. The government also revised its estimate of a 2.9 percent decline in the economy in the first quarter to a less-disastrous drop of 2.1 percent. But hold the bubbly. Put the quarters together and the -2.1 percent first quarter combined with the +4 percent second quarter means that the tepid growth rate that has characterized the economy for too long was essentially unchanged in the first half of the year.

Wall Street

The real question is whether the 4 percent reported growth rate is a new normal, the first step on the long road to a rapidly growing economy, or a one-off fluke. As always, the evidence is mixed. The bad news is that 1.7 percentage points of the second quarter spurt were accounted for by a build-up of inventories: real final sales of the stuff the economy produced were up only 2.3 percent. In the past, growth based on churning out goods that piled up on retailers’ shelves or in wholesalers’ warehouses has slowed as production was cut back to allow a draw-down of the inventory overhang. As one Texas oilman told me in a year in which drilling activity slowed, “You don’t plant ‘taters when you have a cellar full of ‘taters.”  

Then there is the role of catch-up. Goldman Sachs is telling its clients that estimates suggest that “Catch-up from the effect of adverse weather in Q1 … added about one percentage point to Q2 growth.” So the pile-up of inventories and a one-time offset to weather-related sluggishness combined to account for 2.7 percent of the 4 percent second quarter growth.

Finally, there are several factors creating the oft-cited headwinds that are retarding growth. Corporate profits are running below expectations. Continued fiscal tightening by the federal government will have a dampening effect on future growth, probably offsetting any increase in spending by state and local governments. And the wave of regulations that the president has unleashed by asserting an expanded version of his prerogatives – using his pen, as he puts it – is driving up energy costs and adding to the uncertainty created by the upcoming mid-term elections, now only 94 days away. That’s a short time for corporate decision makers to hold off investing until they find out whether Republicans will seize control of the Senate and constrain the president’s ability to increase regulatory and cost burdens on private-sector actors.

Add these factors to the uncertainties facing corporate boards, and it is a surprise that they don’t rein in spending even more:

·     Hamas rockets and terrorist tunnels aimed at the destruction of Israel,

·     Putin’s support of separatists in Ukraine, and his vision of an expanded New Russia,

·     The uncertain effect on European economies of new sanctions on Russia,

·     Still another default by Argentina, and

·     The complete collapse of politicians’ interest in reforming our tax structure to make our companies more competitive with overseas rivals, and our entrepreneurs more willing to risk their capital.

Before returning the champagne to the wine cellar, consider this somewhat cheerier set of facts:

·     The BEA revised its estimates of growth in the third and fourth quarters of 2013 from 4.1 percent to 4.5 percent, and from 2.6 percent to 3.5 percent, respectively.

·     Business investment in the second quarter of this year rose by 5.5 percent after rising a meagre 1.6 percent in the first quarter. Policy makers have been hoping that corporations would replace cash-hoarding with spending, and they might be getting their wish despite all the uncertainties listed above.

·     Investment in housing rose by 7.5 percent after two quarters of decline, suggesting that the housing market might be heating up after cooling earlier in the summer.

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