U.S. economic recovery in midst of mid-year pause

In the first half of 2012, real gross domestic product (GDP) grew at a 1.8 percent pace. Fears of a global slowdown and the sovereign debt situation in Europe remain big downside risks to the recovery and have the potential to drive down net exports while also negatively affecting financial markets.

Government spending continues to be a drag on economic activity, yet anemic job growth remains the main concern in this phase of the recovery. In contrast to the employment figures, the core personal consumption expenditures (PCE) inflation rate remains just below the Federal Open Market Committee’s (FOMC) 2 percent target rate. The recent national income and product accounts (NIPA) revisions—NIPA measures domestic product and income—may shed some light on the state of the economy.

In its July 27 release, the Bureau of Economic Analysis published revisions dating back to first quarter 2009. The overall picture given by the data has not changed—the reported level of economic activity is only slightly below its prerevision level—although it appears that the initial stages of the recovery were in fact weaker, while growth in 2011 proved to be stronger than previously thought. This implies that the slowdown in the first half of 2012 is an even greater deceleration than first observed. Much of the weakness has been concentrated in durable goods, where nominal spending has fallen for four consecutive months.

Gross domestic income (GDI)—another measure of domestic economic activity that theoretically should be equivalent to GDP but differs due to differences in measurement—shows a story similar to that seen in GDP. The new data, along with the revisions, are consistent with an economy growing very modestly, and one that may be facing a number of headwinds limiting growth potential.

For more, go here: www.dallasfed.org/research/update/us/2012/1205.cfm