2Q GDP: Bad Present, Worse Past

Even with expectations low, today's advance estimate of second-quarter GDP from the BEA was disappointing.  Real GDP grew at a 1.3% annual rate in the second quarter of 2011, and the first quarter's growth rate was revised downward to 0.4% (from 1.9% previously estimated).

Government purchases - the G component in the national income accounting identity - was a drag on real GDP for the third consecutive quarter.  In the second quarter, G decreased at a 1.1% annual rate (larger declines in federal nondefense and state and local government spending were partly offset by an increase in defense spending).  Consumption was basically flat (increasing at 0.1% annual rate), while investment rose at a 7.1% pace.  Net exports also made a positive contribution: exports increased at a 6% rate, compared to 1.3% for imports.

Today's release incorporated a large "annual revision" of past data, and it indicates that the recession was worse than previously believed: real GDP shrank 0.3% in 2008 and 3.5% in 2009 (compared to previous estimates of 0% and -2.9%).  This graph from Calculated Risk shows the changes:

According to the revised numbers, real GDP has not returned to its pre-recession level, as we had previously believed.

This makes the badness of the labor market somewhat less of a puzzle - the rise in unemployment had been more than the fall in output seemed to warrant based on historical relationships, but now we know that output was lower than we thought.

In this deep hole (and with long-run interest rates remaining very low), the policy focus on budget cuts makes no sense, of course.  Ryan Avent has a good analogy:

IN 2007, the great ship of the American economy began encountering darkening skies. In 2008, it was suddenly faced with a violent storm which blew it miles off course, well south of where it ought to have been. The country's leaders didn't know how far from their charted path they'd been swept, but they recognised a need to make a course correction. Now, three years later, a look at the maps tells us that the storm was more powerful than previously believed, and it left the vessel much farther south than anyone had expected. The course corrections made earlier? Far too small to bring the ship back to its previous path. Yet none of America's leaders are trying to steer the ship back northward. Indeed, many seem anxious to yank on the tiller and drag the economy farther south still.

Brad Plumer has a nice post on what the data suggest about the recovery act (a.k.a., the "stimulus"), and Brad DeLong has some quick policy suggestions (though there's little reason to hope we'll see anything like them).   Real Time Economics rounds up Wall Street "economist" reaction.