With forecasts predicting GDP growth topping four percent for the second quarter, many are hoping the recovery has finally gained traction and a period of prolonged expansion lies ahead. The current acceleration is a good sign, but much of this spring’s growth is only the economic rebound following a sluggish winter.
Harsh winter weather stalled activity in every economic sector. Snow-covered streets prevent test drives for new cars, and concrete foundations poured in frigid air won’t properly set. Now that temperate weather has finally returned, demand is seeing an extra boost from consumers making purchases deferred during the winter.
The Bureau of Economic Analysis’ (BEA) annual GDP estimates are considered highly accurate economic statistics, but quarterly forecasts are less reliable. Annual GDP is computed from the complete sets of yearly economic data. For instance, the best method for estimating aggregate income is to analyze verified income tax returns. W-2s and 1099s provide accurate income data, but a complete, corrected set is only filed annually.
Forecasts of current-quarter growth are gathered from preliminary reports and proxy measurements. These predictions are essentially fickle, as they tend to exaggerate short bursts of activity. Even the BEA’s official second-quarter GDP estimates—due June 30—will be revised in August and again in September, as newly available data clarifies the extent of GDP growth.
The labor market can provide a steadier measure of economic health. New employees are a long-term investment. Not only do new workers require training, but business expansion reflects substantial capital investments—expenses such as the construction of new office buildings and the procurement of new software. For this reason, the unemployment rate is rarely more volatile than overall GDP.
Lackluster growth during the winter months had a muted effect on overall employment, and the rapid springtime rebound seems to be having a similarly underwhelming impact. Relatively few idle workers were cut as employers waited out the winter, certain that activity would resume in the spring. Now that the economy is rebounding, businesses are reluctant to take on new employees to meet demand that may prove short-lived.
Sustained economic growth should sustain the labor market, but despite steady gains, employment is rising more slowly than expected if the economy were truly experiencing four percent growth. Strong quarterly GDP estimates are a good sign, but until economic gains are spread throughout the labor market, the Federal Reserve is likely to keep interest rates low. The eventual interest rate hike will only follow a sustained period of confirmed GDP growth that also sends unemployment tumbling.