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Portfolio > Economy & Markets

GDP Growth in Q2 Is Feeble 1.3%

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The economy grew 1.3% in the second quarter, according to Commerce Department figures released Friday. The pace was below private-sector expectations of 1.8% growth. Compounding the disappointing numbers, first-quarter GDP growth was revised down sharply from 1.9% to 0.4%. 

In related news, Bloomberg reports a “black Turkey” has flown from the debt and deficit negotiations. Similar to a “black swan,” a euphemism used by financial experts to describe an unforeseen market event that positively or negatively affects investor behavior, a “black turkey” is an event that investors see coming, yet nonetheless they do not act. 

On the size of the economy, prior-years’ GDP growth was also revised downward, most notably for 2009, where it was 0.9% lower than initially recorded, indicating that the recession was even more severe than originally estimated. 

“Today’s first look at GDP in the second quarter confirms what we already knew: The economy isn’t growing as fast as it needs to,” U.S. Commerce Secretary Gary Locke said in a statement. “And every day that we fail to act to lift the debt ceiling and inch closer to default, we threaten our economic progress and job creation.”

Charlie Farrell, principal with Denver-based North Star Investment Advisors, agreed and added that the situation in the small business sector is largely to blame.

“Credit and financing for small businesses remain dismal,” Farrell said. “Fully 70% of GDP comes from consumer spending, but consumers don’t have new jobs, so they’re not spending.”

He noted banks are still dealing with the after-effects of the economic downturn and addressing new regulation. As a consequence, they’re not lending to small businesses in order to help them launch or expand.

“Yes, corporate earnings are strong, but they’re not the ones that create the majority of jobs,” he said. “That comes from small businesses. Would you start a small business in this environment?”

Both Locke and Farrell pointed to the current debt and deficit negotiations as a major source of the country’s fiscal malaise and market uncertainty.

“Experts have repeatedly warned that if this uncertainty continues, our economy will pay the price,” Locke said. “We can’t afford to return to the same failed policies that brought us here. We must build on the progress we’ve made over the last two years and reach a balanced compromise that will reduce our debt and at the same time strengthen our job-creating ability and global competitiveness for the future.”

“Europe has recently been strong and the U.S. markets have done well in the past two months,” Farrell added. “But anytime you go through something like [the negotiations] it adds more and more weight to the economy. It’s like you have a guy standing on this ice and you throw him a bag of cement.”

The problem brought by the “black turkey” may not be cause for too much alarm, according to experts on the issue.

“I think there’s a 99% chance it will be satisfactorily resolved,” Al Vazquez, an advisor with LPL Financial in Gig Harbor, Wash., told Bloomberg. “There is a potential for a black swan, or maybe in this case a black turkey.” 

“There’s really just not a whole lot that you can do,” added Paul Jacobs, a financial planner for Palisades Hudson Financial Group in Atlanta. “You can’t just put it all in a money-market fund, because then if there is a nightmare scenario there’s really nowhere to hide.”


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