Second Quarter U.S. GDP and the Stimulus Package

July 31 - U.S. real GDP declined by 1.0% (annual rate) in the second quarter, the fourth straight quarterly drop, according to today's report by the Commerce Department. While the economy has shown considerable improvement since the first quarter (-6.4%, revised downward), it remains weak and vulnerable to unexpected developments.

A closer look indicates that improvement in the second quarter was driven by the economic stimulus package and trade. The only positive contributions to growth came from government spending (federal, state and local) and imports. Consumer spending turned negative despite a large jump in disposable income (from the stimulus boost) and investment remained negative. Top White House economic adviser Christina Romer said that growth would have been 2 -3 percentage points lower without the stimulus package.

As more of the stimulus package moves through the economy, growth is expected gradually to turn positive over the rest of the year. However, the pick up in growth is forecast to be weak this year. Moreover, employment is expected to lag improvement in GDP and the unemployment rate may well top the 10% mark before heading downward.