A Close Look at How the Economy Is Growing


The economy grew 1.7% last quarter, according to yesterday's report by the Bureau of Economic Analysis. That was way ahead of average estimates of 1% growth, but it humbled no one: Economists whose predictions of this quarter's growth weren't within hailing distance of reality lined up anyway to tell us what to expect next quarter.

No one knows what the economy might do next quarter, or next year, or next decade. This quarter's numbers will be revised several times as it is. But whenever these GDP reports come out, I like to break down the individual components (with the following five charts from the Bureau of Economic Analysis) and see exactly how the economy is growing.

First, here's the big picture:

Now let's get into the individual components.

Consumer spending contributed 1.2% to overall growth. That's about in line with where it's been for the last two years. Spending has help up fairly well given the end of the payroll tax cut in January:

Fixed investment -- businesses and households investing in things like homes, buildings, and equipment -- bounced back after a dip earlier this year. A boom in new home construction should turn what had been our largest economic headwind into a decent tailwind:

All good so far.

So, what kept growth low?

Net exports are typically a volatile figure, and they subtracted 0.8 percentage points from GDP last quarter:

A slowdown in government spending and investment also took a bite:

A lot of the slowdown stemming from government spending has been at the state and local level. That tailwind may be coming to an end, as The Wall Street Journal pointed out earlier this week:

Cities across the U.S. are starting to hire new teachers, firefighters and police officers as a deep and prolonged slide in local-government employment appears to have bottomed out four years after the recession ended.

As always, remember there's basically no correlation between what the economy is doing today and what stocks might do tomorrow. The correlation between current GDP growth and five-year subsequent stock returns is -0.06. For three-year, forward-looking market returns, the correlation is -0.09 -- still about zero! For one-year returns, it's -0.21 -- still low. Returns of the Dow Jones will be determined by an unpredictable mix of earnings and expectations, with no rational connection to quarterly GDP reports.

For more on the economy check out my report, "Everything You Need to Know About the National Debt." It walks you through with step-by-step explanations about how the government spends your money, where it gets tax revenue from, the future of spending, and what a $16 trillion debt means for our future. Click here to read it.

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