U.S. and World Economy Stuck in Second Gear

By Jonathan Scheid
 31-Jul-1524-Jul-15Weekly% ChangeYTD% Change12 month %Change
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The U.S. economy appears to be stuck in second gear. Last week we received our first estimate of second quarter Gross Domestic Product from the Bureau of Economic Analysis (BEA). It suggested that the U.S. economy grew by an annual rate of 2.3% in the second quarter.

While this wasn’t necessarily the large rebound that people had hoped for following a disappointing first quarter, it was fairly close to analyst expectations. Additionally, the BEA revised first quarter GDP to a positive 0.6% from a negative -0.2%. So, the good news is that the economy didn’t shrink during the first quarter and growth appears to be consistently positive.

The first quarter GDP growth rate wasn’t the only data point updated as part of the regular revisions the BEA releases every July. The BEA released revisions to GDP for the last three calendar years in this report based on more accurate and complete data that it gathers and analyzes. While 2012 GDP was revised down by 0.1% to 2.2% and 2014 GDP was unchanged, there was a surprise reduction in 2013 GDP. It was reduced to 1.5% annual growth rate from 2.2%.

With all of these revisions considered, the U.S. economy has only grown at an annualized rate of 1.5% over the last 10 calendar years (from 2005 to 2014). Compared to the prior thirty years (1975 to 2004) where annualized growth was 3.2%, we are truly not growing as fast as we once were. In fact, given that we are a more mature, larger economy, these growth rates of the past may not be achievable. While we surely have the potential to grow at faster rates with our immigration policy, entrepreneurial nature and innovative spirit, lower growth rates may be our reality as we are faced with higher government spending, increasing regulations and an aging population.

The U.S. isn’t the only economy stuck in second gear. The International Monetary Fund (IMF) recently released their July 2015 update to the World Economic Outlook and in it they reduced their 2015 world output projection from 3.5% to 3.3%. While a reduction in 2015 U.S. growth expectation from 3.1% to 2.5% was one of the big reductions, Japan, United Kingdom and Canada all saw their 2015 growth projections fall.

Additionally, the pace of economic expansion in emerging market and developing economies continues to decline. After growing 5.0% in 2013 and 4.6% in 2014, the IMF now estimates that emerging market economies will only grow by 4.2% in 2015. The IMF pointed to lower commodity prices (e.g., oil), a rebalancing of economic drivers in China and concern over geopolitical factors in nations like Russia.

Can the world get out of second gear? Potentially. The global growth outlook from the IMF for 2016 is more positive. U.S. growth is expected to increase to a 3.0% rate. Emerging markets will pick up to 4.7% and the Euro area growth is expected to accelerate from where it was during the last couple of years. Until then, stable, low growth appears to be the norm.

Coming Up: On Friday, the July jobs report is expected to show 212,000 new jobs and an unchanged unemployment rate (WSJ).

The views and opinions contained herein are those of Bellatore Financial, Inc. and have been researched and analyzed by Jonathan Scheid, CFA, President & Chief Investment Officer.

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