The Q2 US GDP report – just terrible

Bureau of Economic Analysis today reported that real gross domestic product in the US increased at an annual rate of 1.3% in the second quarter of 2011. This (newly revised – see below) acceleration in real GDP was driven primarily by a slowdown in import demand, stronger federal spending, and a pickup in non-residential fixed investment. Real gross domestic purchases – GDP minus net exports – was weaker than the headline, increasing 0.7% on the quarter, reflecting the positive contribution from external demand. Domestic demand is barely growing – remember these are annualized rates, not q.q rates.

Below the hood, the pace of personal consumption expenditures slowed markedly, +0.1% in the second quarter compared to +2.1% in the first. Some of the drag to consumption will bounce back in the third quarter, as auto sales and the supply chain disruptions dissipate – durable goods decreased 4.4% over the quarter. On the bright side, real nonresidential fixed investment picked up 6.3% in the second quarter and tripling the pace seen in the first. Real net exports contributed a large 0.58% to the headline growth number, as real exports maintained a healthy pace and imports decelerated over the quarter.

Overall, I think that the story is pretty consistent with the details of the labor market: the economy is improving, but domestic demand is very weak.The US economy is increasingly likely to enter a ‘growth recession’ – sub-potential growth – in 2011. And as David Altig highlights, a growth recession is generally associated with an economic contraction.

On the revisions

The drop in Q1 2011 growth to 0.4% was certainly not expected. Much of it was due to a reclassification of domestic inventory build (adds to GDP) to imports (subtracts from GDP). But there’s a lot more.

Today’s estimates reflect the annual revisions of the US national accounts. The revisions date back to 2003, which show a deeper recession and a quicker rebound. We now know that GDP bottomed in the second quarter of 2009, after having fallen 5.1% since the fourth quarter of 2007. Previously, the cumulative drop in GDP was 4.1%. The recovery through Q1 2011 was slightly faster, 4.9% in the pre-revised data compared to 4.64% in the revised series. (Rdan….4.9% is correct figure)

(Rdan: revised chart to correct calculation error…8/1)

Broadly speaking, though, the revisions show that economic momentum is petering out on a 6-month/6-month annualized basis. In sum, nominal spending on consumption goods and services was revised downward by 307.8 billion dollars spanning the years 2008-2010, and nominal fixed investment spending dropped by 83.9 billion dollars compared to previous estimates. Government spending is proving to be less of a drag than previously thought (in nominal terms), having been revised 5 billion dollars higher compared to previous estimates over the same period.

On balance, the expected 2011 growth trajectory will struggle to top 2%, as a rather positive 2H 2011 of 3.0% and 3.5% in Q3 and Q4, respectively, would imply a 1.9% Y/Y pace for 2011 as a while. I seriously doubt we’ll get that trajectory in H2 2011 – we’ll have to see what economists now forecast – but the downside risk to the economy is pervasive. It’s not just Japan.

Rebecca Wilder

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