What's going on?
Recently there have been signs that the US economy was picking up, but on Friday the initial estimate of second-quarter economic growth was released – and it showed a disappointing growth rate of only 1.2%.
What does this mean?
Most estimates were predicting US economic growth well above 2% in the second quarter, so 1.2% was a significant disappointment. The poor growth was driven mainly by companies selling their inventory without replenishing it – perhaps because they don’t feel confident about being able to sell it on to customers. The hope is that those companies will start rebuilding their inventories during the third quarter and that the economic growth rate will improve. But that’s far from certain. Another hope is that the relatively strong US consumer can help the economy bounce back – but there’s also the risk that the weak business environment will start making things worse for the average American.
Why should I care?
The bigger picture: Businesses are investing less in the future.
Spending on things like buildings and equipment declined which means that businesses are likely to be less productive in the future. For example, a factory might forgo buying a new, better piece of machinery (perhaps because its owner doesn’t have confidence that customers will buy much stuff in the future). That means that the company’s production is less efficient than it could be and that, on an overall level, the economy doesn’t grow as much as it could.
For you personally: Global growth is worsening – and that’s a problem for everyone.
Data on Friday showed that the Eurozone economy grew at the same anaemic (annualized) rate of 1.2%. The problem isn’t like a financial crisis where the impact is immediate and severe. But rather it’s a long-term issue: economic growth drives improvement in living standards. So lower growth leads to living standards that are lower than they could be (e.g. shorter life expectancy, more crime, etc.).