We have new GDP numbers from the Department of Commerce’s Bureau of Economic Analysis.

• U.S. real Gross Domestic Product grew at an annual 1.6% rate in the second quarter of this year.
• This is the second estimate for Q2 GDP.  The first, released at the end of July, was +2.4%.  This is therefore a downward revision, but we’re still growing, albeit slowly.
• The economy is growing more slowly than it did in Q1, when it was growing at a 3.7% annual rate.

As a rule of thumb, when the economy is operating near full employment, the U.S. can sustain a long-term real GDP growth rate of between 3 and 3.5 percent.  When we’re operating way below capacity, as we are now, in a strong recovery you would expect and hope that we’d grow much faster than that.  This is not yet a strong recovery.

I want to use this as an opportunity to explain an arithmetic point about GDP growth rates and stimulus.  The conclusion sounds simple but when they see it in the numbers a lot of people get confused:  When stimulus ends, the GDP growth rate goes down.

Let’s imagine we have an economy that this year will produce 100.  Also imagine that we have a magic crystal ball that lets us see that, if we do nothing, GDP will grow by 1 for each of the next three years.  We call this our baseline.

Full post here