REAL GDP
With the downward revision of second quarter real GDP growth from a 2.4% growth rate reported in the advance report to 1.6% reported in the first revision, real GDP in the first year of recovery now appears to be 3%. As was originally reported this is still stronger than the first year of recovery in the two jobless recoveries of 1991 and 2001. But compared to previous recoveries and the depth of the recession this still looks like an extremely weak recovery.
The major revision was in the trade sector that was reported here when the June trade data was released. Real imports rose at a 32.4% annual rate while real exports jumped at a 9.1% annual rate. As a consequence while real gross domestic purchases grew at a 4.9% rate, an improvement from the 3.9% rate in the first quarter, real final sales of domestic product only grew at a 1.0% rate versus a 1.1% in the first quarter.
Probably the main reason real GDP growth was stronger than most expected was the strength of government which grew at a 9.1% rate versus a 1.8% rate in the first quarter.
This surge was driven by defense spending that rose at a 7.3% rate. Defense procurement is always higly volatile and does not imply anything for future growth.
While those forecasting a double dip will see this report to be supporting their forecast,
it looks to me like an argument against a double dip. The main area of weakness was trade, not domestic demand and there is little reason to expect domestic final demand to swing from a 4.9% growth rate to an actual decline, even if it does slow. But import growth is almost certain to slow from the explosive growth in the second quarter so trade is unlikely to be such a significant negative in the second half. While a swing to negative real GDP growth in the second half is unlikely, continued sub-par growth remains the most likely scenario.
But in an environment of sub-par growth, the economy does not have the momentum to absorb a negative shock.
Personal consumption accounted for 1.4% of the 1.6% rise in GDP, rather than 1.2% of a 2.4% rise. Non-farm inventories, meanwhile, accounted for 0.6%, not 1.1%. So less inventory and more consumption, and then some more “less inventory”. Pretty virtuous, and then tack on an upward revision to equipment and software (largely offset by a downward revision to non-residential construction) and we look more virtuous still.
Now, while discussing virtue, let’s talk trade. Yes, domestic demand is a really big deal. However, structure counts in the long run. Imports tend to feed inventories and consumption. Inventories amounted to a bigger drag in revision than spending amounted to an add, so this is not just a case of not knowing how much we spent in the first release of the data. It is a case of not knowing who’s stuff we bought. If higher than expected domestic demand doesn’t account for the shift in trade, then how about structure? How about we are just on a higher import trend than we knew, which makes increases in domestic final demand less effective in boosting domestic production, forever and always.
The trade part of this report may not be all that neutral as regards the future. It’s a question of signal and noise for now.
i’m not sure that’s the correct interpretation. increase savings rates reflect debt being paid down. the fact is that we consumed more than we made for an extended periods and ran up consumer debt levels > 90% of GDP, a level not seen since 1929. consumer debt rose from 4.6tn in 1999 to 12.5tn in 2008. we played, now we have to pay.
your notion of flat savings rates seem odd given that they were actually negative in many recent periods. why should savings be flat? and what is a “consumption based economy”? how do you make a determination like “underspending” and “overly positive savings rate”? our savings rate is still quite low. you seem to have this notion that we all ought to be pedal to the floor all the time. i doubt you can defend a single one of your claims.
“german rates are low now because of a booming export market, but what of 2006 when they were twice ours?”
At the end of 2008, when the US was deep in the worst recession in living memory, Germany reached record employment rate, and has kept that rate despite the recession. I could make the same point using the unemployment rate but official unemployment rates are unreliable and especially so in the US where falling unemployment rates most of the time indicate a toughening of the labor market because many job seekers are giving up. This is pretty well known. The US labor market has never recovered from the 2001 recession despite so-called economic growth whereas Germany`s labor market has improved during the 2000s with lower economic growth. Economic growth rates do not tell us much of use about the state of an economy. Especially in the US during the past 10 years, so-called economic growth really reflected growing inefficiency in the health care industry (about 30% of GDP growth) and an unsustainable boom in the construction industry resulting in huge wealth destruction.Also, the “investment in technology” argument fails completely since US GDP growth is mostly due to consumption, not investment (again Germany looks way better in comparison)
You may choose to ignore these facts but at your peril. (good article: http://www.harpers.org/archive/2008/06/0082042)
Now, would anybody like to react to my original suggestion?