The headline news this week is that the U.S. economy grew at a 2.8% annualized pace in the second quarter, which is basically a continuation of two years of solid, if up-and-down, growth. Consumer spending was (surprisingly) strong (up 2.3% year over year), and business investments rose at an 11.6% rate. But behind the robust numbers is a more sobering picture: the size of the gains in some of the economic areas are slowing down (see graph), and economists are calling this an economic cooling-off period.
Is this good or bad news? It depends on who you ask. Faster growth would bring the danger that the economy will overheat and trigger a recession, and it would probably cause the Fed to reconsider its plan to lower interest rates. Slower growth suggests that the economy might be heading into a ditch somewhere in the near future.
Perhaps the best indicator that the U.S. economy is on a sustainable, long-term path to growth is the rise in investment in manufacturing facilities. As you can see from the graph created by the St. Louis Fed, the level of investments is very nearly off the charts compared with the average since 2008. Whenever they’re completed, those new facilities will be filled with workers, and will add to manufacturing output overall. The historically low 4.1% unemployment rate could come down and bring the American economy closer to full employment—which probably also means higher wages as more companies have to bid for workers.
And it’s helpful to remember that when we talk about a slowdown in growth, the 2.8% figure is compared with America’s recent past. If we compare America’s economic picture with other countries, the picture looks a lot brighter. The European Union countries experienced just 0.5% GDP growth last year, and the OECD average was 1.7%.