Over the past few months, it appears that the first-quarter economic growth spurt has begun to decelerate in America. This is troublesome, as stock market investors had anticipated that we would be seeing economic growth finally gain steam.
Unfortunately, we don’t have the global economy on which to rely. Much of the world remains quite weak, and this lack of demand in the global economy is creating a drag on our own nation.
While first-quarter economic growth was relatively strong at 2.4% real gross domestic product (GDP), it appears that in the second quarter, economic growth slowed to less than two percent. This was on the heels of tax increases, a slowdown in manufacturing, and budget cuts by the federal government.
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The real goal for economic growth is to have a rate of increase that is close to optimal, which is approximately 2.5%. An economic growth rate above this level would be extremely positive, as it would quickly eliminate any slack in the labor market; however, it would be best if it didn’t grow too high,because that would create strains in the economy
and could lead to inflation.
We have seen only anemic job creation, partly because the economy has averaged an economic growth rate of just 2.1% since hitting a bottom in 2009. While the growth is positive, it simply is not strong enough to generate the number of jobs needed to fill the void left by so many lay-offs during the recession.
This weakness in the global economy is also a factor in the lack of manufacturing jobs. Many of the jobs created over the past two years have been in the low-wage service sectors, not manufacturing. The level of the job creation for manufacturing will be an important part of the total economic growth rate for the remainder of the year.
Many parts of the global economy are slow, but not all nations are experiencing the same economic problems. Some parts of the global economy are still mired with deflation, such as Japan; other parts are lacking access to credit, such as certain countries in the European Union; and some areas of the global economy have extremely high levels of inflation, such as India.
While the global economy remains mixed, consumer sentiment within America is quite resilient in spite of relatively anemic levels of economic growth. This could be a result of rebounding home prices and the stock market at all-time highs.
However, economic growth needs to be able to accelerate for a continuation of not only consumer sentiment, but also job creation. No business will start hiring people until it’s a safe bet that their business can grow revenues and earnings in excess of the costs of labor.
With economic growth showing signs of slowing over the past month here in America, and the global economy not reaccelerating, there needs to be several months of data indicating that this trend is reversing before I would be comfortable in saying that the coast is clear.
This article Coast Isn’t Clear for America, Economic Growth Slowing was originally published at Investment Contrarians