Real GDP grew at an annual rate of 2.8% in the 2nd quarter even though it was only expected to grow 2.1%

Only economists can probably get so excited about 0.7%. I will explain below. See U.S. economy grew at a 2.8% pace in the second quarter, much faster than expected by Jeff Cox of CNBC. Excerpt:

"Real gross domestic product, a measure of all the goods and services produced during the April-through-June period, increased at a 2.8% annualized pace adjusted for seasonality and inflation. Economists surveyed by Dow Jones had been looking for growth of 2.1% following a 1.4% increase in the first quarter.

Consumer spending helped propel the growth number higher, as did contributions from private inventory investment and nonresidential fixed investment.

Personal consumption expenditures, the main proxy in the Bureau of Economic Analysis report for consumer activity, increased 2.3% for the quarter, up from the 1.5% acceleration in Q1. Both services and goods spending saw solid increases for the quarter."

That might not seem like a big deal, just 0.7% more than expected. In my macro courses we read a chapter in the book The Economics of Macro Issues. The chapter discussed how nations with common law systems, where property rights are better protected than in nations with civil law systems, have higher growth rates. I pointed out to my classes that even a small difference in growth rates ends up causing a very big difference in per capita incomes due to the annual compounding effect.

The table below shows how much per capita income would be at various rates after 100 and 200 years. Assume we start with a per capita income of $1,000. If we grow 2.0% per year, after 100 years it will be $7,245. At 2.1% per year, it would be $7,791 or about $700 more. That is how much that little .1% matters. The difference over 200 years is about $11,000. After 100 years at 2.5% per year, per capita income would be $11,814. That is $4,000 more than the 2.0% rate. Small differences in growth rates add up to big differences over time.

Using the latest GDP figures for another example, if we grow 2.8% a year for the next 30 years, and if per capita GDP now is, say, $80,000, it would reach $183,182. But if it only grows 2.1% for 30 years, per capita GDP would be $149,232. That is about $34,000 less than if we grow 2.8%.

Per Capita Income After 100 and 200 Years At Various Annual Growth Rates (Starting With $1,000)

 Also see Scott Wolla on an Accounting Error about Imports and GDP by Pierre Lemieux.

Textbooks often show

GDP = C + I + G + (X – M)]

C = consumption spending
I = investment spending
G = government spending

with exports indicated by “X” and imports indicated by “M.” 

But

"the –M component is included as an accounting mechanism to ensure that the value of imported goods already included as personal consumption expenditures (C), gross private investment (I), or government purchases (G) is subtracted out."

GDP is supposed to measure the value production in the USA. If we spent $100 on imports, and that was on consumer goods, then the reported GDP would be $100 higher than it should be because we are measuring the value of domestic production and that $100 is already included in C. Subtracting M just gives the correct or accurate answer. Importing more does not reduce domestic production.

Also see Do imports subtract from GDP? from the St. Louis Fed.