Second-Quarter GDP Revised Upward, Still Slow

GDP growth was revised up to a still-anemic 1.7 percent in the second quarter.

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Housing is still a major drag on economic growth.

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The economy grew at an annual rate of 1.7 percent in the second quarter, the Commerce Department reported today. The figure represents an upward revision from the previously reported 1.5 percent but is a slowdown from the first quarter's growth rate of 2 percent.

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That slowdown is the result of slowing personal consumer spending, as well as slowing spending on housing and nonresidential fixed investment—a category that includes business structures, equipment, and software. However, a smaller decrease in government spending than was seen in the first quarter tempered the deceleration. Altogether, the figures are just one more indicator that the recovery is stuck in low gear.

"It's just basically showing that we still have an economy that's really subpar," says Beata Caranci, vice president and deputy chief economist at TD Economics. "The question is now, if we look forward, do we expect the third quarter to be different from the second? And I would say no."

She sees a multitude of factors continuing to drag on the economy—a weak housing market, penny-pinching by consumers, the European debt crisis, and the looming tax and fiscal policy uncertainty—keeping GDP in slow territory. For these reasons, Caranci says she foresees GDP below 2 percent in the first half of 2013, and says that the economy may not show strong growth again until 2014.

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"It's impressive that the economy, given those challenges, can continue to grow at 1.5 to 2 percent," adds Caranci.

Of course, if Congress fails to resolve several tax and spending issues before year's end, the picture could be much worse. Last week, the Congressional Budget Office altered its outlook on the so-called fiscal cliff, predicting that if scheduled tax cuts expire and spending cuts go into effect, the economy would contract by 0.5 percent in 2013 and make for a jobless rate of 9.1 percent in late 2013.

As with any indicator released these days, today's GDP figure will certainly be scrutinized for how it might affect the Federal Reserve's future monetary policy actions. Fed members signaled in their most recent minutes a willingness to undertake more accommodative policies, unless new indicators showed "a substantial and sustainable strengthening" in the recovery's pace.

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Today's report shows a slight quickening, though perhaps not "substantial or sustainable." But even if a slow economy does inspire a third round of quantitative easing, there are questions over how much it would boost the economy.

"I don't think it's necessarily going to have much of an effect at all," says Paul Edelstein, director of financial economics at IHS Global Insight. Long-term interest rates are already very low, he points out, and there's no guarantee that easing would push bond yields lower. And even if mortgage rates drop beyond their near-historic lows, that still might not be enough to help bring new buyers into the market. And with housing a major drag on growth, that does not bode well for a stronger or more stable recovery.