U.S. GDP Grew 1.5% in the Second Quarter. Is That Good or Bad?

First, what does 1.5 percent mean?

The figure is annualized.

The economy did not literally become 1.5 percent larger during the three months from April through June.

BEA reported that quarterly real GDP increased approximately 0.4 percent from the first quarter. That rate is converted into an annualized figure showing what growth would look like if the quarter's pace continued for a full year.

Annualization can make quarterly economic movements sound more dramatic.

This is why readers should distinguish between annualized quarter-over-quarter growth and year-over-year growth.

GDP itself is an accounting identity

GDP measures the market value of final goods and services produced within the economy.

One common framework breaks it into household consumption, private investment, government spending, and net exports.

Imports are subtracted because GDP is attempting to measure domestic production.

That last point causes confusion.

If Americans buy more imported goods, imports subtract more from the GDP calculation even though the increased spending may reflect healthy consumer demand.

A lower headline GDP figure therefore does not automatically mean households are doing poorly.

Private domestic demand was stronger than the headline suggested

One particularly interesting number in the July 30 report was real final sales to private domestic purchasers.

This measure combines consumer spending with private fixed investment.

It increased at a 3.9 percent annualized rate during the second quarter, up from 1.7 percent during the first quarter.

That is substantially stronger than the 1.5 percent headline GDP figure.

The difference came partly from components such as government spending, inventories, and trade.

Economists sometimes examine private domestic demand because it can offer a cleaner view of underlying activity within households and businesses.

Investment was still contributing

Business investment increased during the quarter.

BEA reported gains in equipment along with intellectual-property products such as software and research and development.

Nonresidential structures moved lower.

This matters because investment today can affect productive capacity later.

When businesses purchase new equipment or develop software, they may be preparing to produce more efficiently in future years.

Strong investment can therefore support long-run economic growth even when its short-term effects are uneven.

Inflation complicated the report

The price measures inside the GDP report remained elevated.

The price index for gross domestic purchases increased at a 5.7 percent annualized rate during the second quarter.

The PCE price index increased at a 5.1 percent annualized rate for the quarter.

Those quarterly annualized figures should not be confused with twelve-month inflation rates.

Still, they show why Federal Reserve officials remained focused on prices.

Economic growth had slowed while inflation remained an issue.

That combination makes monetary policy considerably more difficult than a straightforward recession or straightforward inflation boom.

GDP is important, although it is not your life

GDP can grow while an individual household struggles.

A country can produce more while some workers lose jobs.

Output can increase while housing remains unaffordable.

GDP is designed to measure production. It is not a complete scorecard for human well-being.

For investors and policymakers, however, it remains useful because corporate revenue, employment, tax collections, and credit conditions are all influenced by the level of economic activity.

The second-quarter report did not describe an economy racing ahead.

It also did not describe one that had stopped growing.

The more useful interpretation was that growth had moderated while important parts of private demand remained relatively strong.