Statement of Assistant Secretary for Economic Policy Karen Dynan for the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association

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8/4/2014

WASHINGTON – Real GDP rose strongly in the second quarter, as the effects of the unusually harsh winter and other transitory factors receded.  While economic growth may have faltered temporarily in the first quarter, the recovery has been resilient on the whole, with solid private-sector demand helping to offset the effects of extensive fiscal retrenchment over the last few years.

Since the recovery began in the second quarter of 2009, real GDP has grown at an average annual rate of 2.2 percent, and private domestic final demand has grown at a 2.7 percent annual rate.  The private sector has added nearly 10 million workers to payrolls since the employment trough in February 2010.  As of July, private-sector employment was 1.1 million above its January 2008 peak.  The unemployment rate fell from a high of 10.0 percent in late 2009 to a six-year low of 6.1 percent in June before edging back up to 6.2 percent in July. Stronger household balance sheets, sustained improvement in the manufacturing sector, and the potential for a rebound in housing all point to a faster and more broad-based private-sector economic recovery going forward.  Moreover, the drag posed by fiscal consolidation has been receding. 

The advance second-quarter GDP report showed that real GDP increased at an annual rate of 4.0 percent after declining 2.1 percent in the previous quarter.  Most major components strengthened.  Consumer spending accelerated to a 2.5 percent pace from a 1.2 percent rise in the first quarter, boosted in part by robust motor vehicle purchases.  Businesses stepped up the pace of investment after a soft start to the year, with outlays for equipment, structures, and intellectual property products rising 5.5 percent.  Inventory accumulation picked up sharply following a pronounced slowdown in the first quarter, adding 1.75 percentage points to second-quarter GDP growth.  Residential investment increased 7.5 percent after two quarters of decline, as housing demand picked up somewhat.  Although the trade deficit widened in the second quarter, net exports posed a significantly smaller drag on growth than in the first quarter, reflecting a rebound in exports.  Government spending also rose, with state and local outlays increasing at their fastest pace in five years.  However, federal expenditures continued to fall, extending a trend that began in late 2010. 

Last week’s advance GDP report was accompanied by revisions to historical data spanning back to 1999.  In general, the revisions were small and did not alter the broad contours of the recovery to date.  The most noteworthy revisions were for the 2011-2013 period and largely reflected the incorporation of newly available and revised source data.   Revised data show that growth was stronger in 2013 than previously estimated, especially in the second half of the year, and a bit slower in 2011 and 2012.  However, the pace of growth over the course of the recovery was unrevised.  Real GDP rose 2.1 percent at an annual rate from the second quarter of 2009 through the first quarter of 2014.  The output loss during the Great Recession was revised up slightly, but the drop was still the deepest in the postwar period. 

Looking at the labor market, nonfarm payroll employment growth has accelerated notably this year.  Over the past six months, monthly payroll gains have averaged 244,000, the strongest six-month pace since early 2006 and well above the 194,000 average monthly gain for all of 2013.  The unemployment rate declined sharply last year and has fallen considerably further this year, dipping to a six-year low of 6.1 percent in June before edging back up to 6.2 percent in July as labor force participation increased.  Broader measures of labor market underutilization have also improved but have not yet returned to their pre-recession levels.  The so-called U-6 measure of unemployment, which includes workers who are marginally attached to the labor force and those working part-time for economic reasons, has fallen 5 percentage points from its April 2010 peak to its current level of 12.2 percent, but remains more than 3 percentage points above its 2001-2007 average.  The long-term unemployment rate has fallen by 0.7 percentage point over the past year, accounting for two-thirds of the decline in the overall unemployment rate.  However, at 2.0 percent, this measure is still double its pre-recession average.  Finally, after several years of decline, the labor force participation rate has stabilized in recent months and in July edged up to 62.9 percent.  While movements in all of these indicators are consistent with improving labor market conditions, there is more work to be done to reduce labor market slack, particularly among the long-term unemployed and the underemployed. 

The fundamental improvement in the housing sector over the past few years remains intact, even as activity has slowed in the past year or so.  Last year, housing starts, new home sales, and existing home sales all reached multi-year highs, but, since mid-2013, these indicators have generally trended sideways in part reflecting the rise in mortgage rates last year and, more recently, severe winter weather.  Home prices have risen notably from their post-recession lows, but the pace of appreciation has moderated of late.  While higher home prices and higher mortgage rates have together weighed on housing demand, housing affordability remains high by historical standards for the typical household and mortgage credit availability continues to gradually improve.  Meanwhile, rates of mortgage delinquency and foreclosure have declined substantially and are approaching pre-recession levels. 

Headline consumer price inflation has trended upwards over the past year, but still remains moderate.  For the year through June 2014, the consumer price index (CPI) rose 2.1 percent, a bit above its 1.8 percent year-earlier pace.  Core consumer prices—that is, without the volatile food and energy components—rose 1.9 percent in the twelve months through June, up from a 1.6 percent pace in the previous twelve-month period.  Higher core services price inflation contributed to the uptick. 

The temporary but notable setbacks to growth during the first quarter of this year suggest that growth for 2014 as a whole will likely be slower than last year’s 3.1 percent increase.  However, the strong rebound in the second quarter along with favorable underlying fundamentals suggest that the economy will continue to grow at an above-trend pace through the end of 2014 and into 2015.  A consensus of private forecasters is currently projecting real GDP growth of 3.2 percent for the second half of this year and 2.9 percent over the four quarters of next year.  The Administration’s most recent economic forecast in the Mid-Session Review of the FY 2015 Budget, which assumes the President’s policies are enacted, shows stronger growth of 3.4 percent during 2015.  The resumption of a faster pace of growth will be instrumental in helping to restore full employment.  

As a direct result of prudent choices as well as faster economic growth, the fiscal position of the federal government has improved significantly over the past four years and the outlook for federal finances is brighter.  The deficit has decreased by more than half from a peak of 9.8 percent of GDP in FY 2009 to 4.1 percent of GDP in FY 2013.  The Administration’s FY 2015 Budget would trim the deficit substantially further and put federal debt on a declining trajectory as a share of the economy.  According to the Mid-Session Review, the federal budget deficit is projected to decline to 3.4 percent of GDP in FY2014, and to 2.9 percent of GDP in FY2015.  The debt-to-GDP ratio is projected to peak at 74.6 percent in FY 2015 and then begin to decline.  The Administration’s policies are designed to reinforce the economic gains we have made thus far and put both our economy and our nation’s finances on a more durable and sustainable path over the medium term. 

News Source : Statement of Assistant Secretary for Economic Policy Karen Dynan for the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association
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