The latest data show that the U.S. economy remained in a low growth pattern in the first half of 2016, but what is more noteworthy is the unprecedented divergence between public and private sector growth. If the public sector doesn't start contributing more, the U.S. could see below-average growth performance. Growth disappoints in second quarter U.S. real gross domestic product (GDP) grew at an annualized rate of 1.2 percent in the second quarter, half the rate expected by the market. The surprising result was largely due to a sharp contraction in corporate inventories. Business inventories contracted an annualized $8.1 billion in the second quarter after rising by $40 billion in the first three months of the year, according to preliminary estimates. The decline in business inventories shaved 1.2 percentage points off economic growth in the second quarter.
Needless to say, there is weakness in other areas of the economy as well. Business investment fell 3.2%, with spending on infrastructure (mainly oil wells) and equipment slipping. Residential investment also fell by 6.1%, although this reflected an advance in construction activity in the first quarter due to good weather. Defense spending also contracted again, falling 3% this quarter. Still, consumer spending continued to be solid, allowing the economy to maintain number list a positive growth trend this quarter. Real consumer spending grew at an annualized rate of 4.2% this quarter, the largest single-quarter increase since the fourth quarter of 2014 and the third time in the current cycle of economic expansion that consumer spending has grown more than 4% quarter. Real final sales rose 2.4%, driven by stronger final consumer demand. Given that consumer spending picked up in the second quarter, the report also showed continued strength in the third quarter, and inventory investment is expected to remain at a normal level in the third quarter, real GDP growth should be at least 2.5% to 3%. . Revised GDP: Public vs Private Sector Performance .
The GDP revisions over the past three years have been relatively small and have not affected fundamental trends. The most striking focus is the unprecedented gap in growth paths between the private and public sectors. From 2010 to 2015, the average growth rate of private sector projects was 4.6%. In contrast, the public sector is less than 1%. In terms of real growth rates, the private sector grew at an average annual rate of 3%, while the public sector declined at an average annual rate of 1.3% (Figure 1). Picture 1 Figure 1: Unprecedented gap between public and private sector GDP Growth trends in the private sector are directly related to monetary policy, and nominal and real growth rates over the past six years suggest that aggressive policy easing has worked to a considerable extent. But the overall growth rate of the real economy has been weighed down by an unprecedented fiscal burden. Some might argue that the public sector can do very little to boost overall spending, especially considering the amount of transfers (social and pension benefits).