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Economy Muddling Along; Some Weaknesses Remain

Today’s advance estimate for gross domestic product (GDP) released by the Bureau of Economic Analysis shows that the economy is growing at a lower than expected 3.7 percent annual rate. While GDP growth is still in positive territory, the usual post-recession boom continues to elude us.

The largest contributor to economic growth were personal consumption expenditures, which grew at a 4.6 percent annual rate and were led by a strong surge in durable goods. The trade situation was a drag on the economy, with export growth failing to keep pace with imports.

Private investment, while growing at a 5.2 percent annual rate, showed a marked deceleration from the previous four quarters, which had seen an average growth rate of nearly 17 percent. The investment deceleration lends some support for potential weakness in business investment, as we highlighted in yesterday’s column.

Unfortunately, as the economy recovers, many middle-income families are not seeing any benefit from the current recovery. The most recent data from the Census Bureau, for example, show that the average income for middle-class households has dropped by $1,525 since its peak in 2000 (click here for graph).

Despite the positive growth, risks to the economy remain. Extremely high oil prices will reduce the disposable income of many families, especially when the weather begins to cool and people are impacted more significantly by higher energy prices. Looking toward the longer run, two massive deficits – the federal budget deficit and the trade deficit –threaten to dampen economic growth in the future.

In addition, a recent report by the Employee Benefit Research Institute also indicates that rising health care costs might be causing people to reduce their savings. The report found that “[o]ne-quarter [of survey respondents] experiencing increased costs report they have decreased their contributions to a retirement plan and almost half report they have decreased their contributions to other savings.” Since savings provide the capital needed for business to invest, the reduction in private savings is of concern—last quarter personal savings was below one half of one percent of disposable income. This is especially concerning at a time when large federal budget deficits are straining national savings as well.

Overall, while the economy continues to drift forward, there are still many who do not see any improvement—middle-class incomes are down, the labor market continues to be weak, poverty is up, more people are lacking health insurance. Restoring strong economic growth should be a top priority of whoever occupies the White House – and it has become abundantly clear that the policies of the last four years have not gotten the job done.

John S. Irons is the associate director for tax and budget policy at the Center for American Progress.

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