The 1.7 percent increase in gross domestic product for the second quarter shows a U.S. economy that’s plodding along. The job market looks much stronger, so there’s obviously a disconnect. Many economists are betting the labor figures right now are more accurate, while gross domestic product is understated for a host of reasons and will eventually catch up. “The employment numbers are closer to the true picture,” says Harm Bandholz, chief U.S. economist at UniCredit Group (UNI:IM) and the top payroll forecaster in the past two years, according to data compiled by Bloomberg. “I’m confident GDP growth will pick up in the second half and even more in 2014.”
Payrolls climbed 202,000 a month on average from January through June, up from 180,000 in the second half of 2012, according to Department of Labor data. Bandholz and other economists say such gains typically come with an economy growing at close to 3 percent. Government figures show that for the first two quarters, growth averaged 1.4 percent. Two reasons behind the weak GDP growth in the first half were the drag from federal cutbacks and an increase in payroll taxes that lowered take-home pay.
The effects of the fiscal tightening will wane in the second half, allowing growth to pick up. Consumer confidence is at the highest levels since 2008, auto sales and housing are rebounding, job openings are expanding, and corporate profits have mostly exceeded estimates. After adjusting for the boost in payroll tax rates, employee income tax withholdings were up about 6 percent in June from a year earlier, a sign that more Americans have landed jobs or that those already employed are earning more. The amount of withholding is the best showing for June since 2007, according to Joseph LaVorgna, chief U.S. economist at Deutsche Bank (DB). “The signals are that the economy is not only doing OK but doing better than a lot of people think,” says Neil Dutta, head of U.S. economics at Renaissance Macro Research.
A Federal Reserve study has found that gross domestic income, the money earned by the people, businesses, and government agencies whose purchases go into calculating growth, is a better gauge of the economy than GDP. After the usual revisions, growth estimates tend to follow income figures closely, according to a 2010 paper by Fed economist Jeremy Nalewaik. Adjusted for inflation, GDP grew at a 2.2 percent annualized rate over the final quarter of 2012 and the first quarter of this year, lagging GDI’s gain of 5.1 percent, says Dutta. “We could see a convergence as growth picks up,” he says.
One sign of a stronger recovery: Companies such as General Electric (GE) are gearing up to meet demand. GE is investing in its aviation and oil and gas divisions, opening factories, and buying companies such as Lufkin Industries, a maker of oil-field equipment. “Orders in the U.S. were the strongest we’ve seen in some time,” Chief Executive Officer Jeffrey Immelt said on GE’s earnings teleconference on July 19. “You’re going to get some gathering momentum, I think, in the second half of the year.”