Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Stock Market Election Year Cycles – What to Expect? - 4th Jun 20
Why Solar Stocks Are Rallying Against All Odds - 4th Jun 20
East Asia Will Be a Post-Pandemic Success - 4th Jun 20
Comparing Bitcoin to Other Market Sectors – Risk vs. Value - 4th Jun 20
Covid, Debt and Precious Metals - 3rd Jun 20
Gold-Silver Ratio And Correlation - 3rd Jun 20
The Corona Riots Begin, US Covid-19 Catastrophe Trend Analysis - 3rd Jun 20 -
Stock Market Short-term Top? - 3rd Jun 20
Deflation: Why the "Japanification" of the U.S. Looms Large - 3rd Jun 20
US Stock Market Sets Up Technical Patterns – Pay Attention - 3rd Jun 20
UK Corona Catastrophe Trend Analysis - 2nd Jun 20
US Real Estate Stats Show Big Wave Of Refinancing Is Coming - 2nd Jun 20
Let’s Make Sure This Crisis Doesn’t Go to Waste - 2nd Jun 20
Silver and Gold: Balancing More Than 100 Years Of Debt Abuse - 2nd Jun 20
The importance of effective website design in a business marketing strategy - 2nd Jun 20
AI Mega-trend Tech Stocks Buying Levels Q2 2020 - 1st Jun 20
M2 Velocity Collapses – Could A Bottom In Capital Velocity Be Setting Up? - 1st Jun 20
The Inflation–Deflation Conundrum - 1st Jun 20
AMD 3900XT, 3800XT, 3600XT Refresh Means Zen 3 4000 AMD CPU's Delayed for 5nm Until 2021? - 1st Jun 20
Why Multi-Asset Brokers Like are the Future of Trading - 1st Jun 20
Will Fed‘s Cap On Interest Rates Trigger Gold’s Rally? - 30th May
Is Stock Market Setting Up for a Blow-Off Top? - 29th May 20
Strong Signs In The Mobile Gaming Market - 29th May 20
Last Clap for NHS and Carers, Sheffield UK - 29th May 20
The AI Mega-trend Stocks Investing - When to Sell? - 28th May 20
Trump vs. Biden: What’s at Stake for Precious Metals Investors? - 28th May 20
Stocks: What to Make of the Day-Trading Frenzy - 28th May 20
Why You’ll Never Get Another Stimulus Check - 28th May 20
Implications for Gold – 2007-9 Great Recession vs. 2020 Coronavirus Crisis - 28th May 20
Ray Dalio Suggests USA Is Entering A Period Of Economic Decline And New World Order - 28th May 20
Europe’s Coronavirus Pandemic Dilemma - 28th May 20
I Can't Pay My Payday Loans What Will Happen - 28th May 20
Predictive Modeling Suggests US Stock Markets 12% Over Valued - 27th May 20
Why Stocks Bear Market Rallies Are So Tricky - 27th May 20
Precious Metals Hit Resistance - 27th May 20
Crude Oil Cuts Get Another Saudi Boost as Oil Demand Begins to Show Signs of Life - 27th May 20
Where the Markets are heading after COVID-19? - 27th May 20

Market Oracle FREE Newsletter


U.S. Economy Q2 GDP Contraction, Awaiting the Revision for Real Data

Economics / Recession 2008 - 2010 Aug 01, 2009 - 05:28 PM GMT

By: Paul_L_Kasriel


Best Financial Markets Analysis ArticleThe Commerce Department's first guess at second-quarter real GDP has the U.S. economy contracting at only 1.0% annual rate compared to the first quarter's downwardly revised annualized contraction of 6.4% (previously reported as a 5.5% rate of contraction). On a year-over-year basis, real GDP was down 3.9% in the second quarter, the most severe year-over-year decline in the post-WWII era (see Chart 1).

Chart 1

In this advance estimate of second-quarter real GDP, the Commerce Department does not yet have June data for inventories or net exports. So, let's look at the data that Commerce thinks it has - final sales (i.e., excluding inventories) to domestic purchasers. The rate of descent here, too, has slowed - an annualized contraction of just 0.2% in the second quarter vs. a 4.1% rate of contraction in the first quarter. A step up in government expenditures - federal as well as state & local - played a big role in moderating the contraction in domestic final demand. As shown in Chart 2, real government expenditures rebounded with annualized growth of 5.6% in the second quarter. Real private domestic expenditures on final goods contracted at an annualized rate of 3.2% - still very weak, but not as weak as the first quarter's annualized contraction of 7.3%.

Chart 2

In the second-quarter rebound in real government expenditures we see the early spending effects of the federal fiscal stimulus program, not so much in federal expenditures, but in state & local government expenditures. As shown in Chart 3, real state & local government gross investment (i.e., infrastructure spending) soared to an annualized rate of 13.3% in the second quarter while real general operating expenditures were nearly flat. With state & local fiscal situations in dire straits, where did these governments get the funding to engage in so much investment, "gross" as it might be? Most likely directly from the U.S. Treasury or indirectly from the U.S. Treasury from "Build America" bonds - taxable bonds issued by state & local governments but with a Treasury rebate to the issuers.

Also, state & local government operating, or consumption, expenditures likely would have been weaker had it not been for U.S. Treasury funds transfers to these government entities. Going forward, federal government nondefense gross investment expenditures are likely to grow rapidly rather than contract at the 0.9% annualized pace that they did in the second quarter. President Obama is urging federal agencies to step up the pace of actual spending of previously-authorized expenditures. Say no more.

Chart 3

There was reported a marked slowing in the rate of decline of business capital spending - on structures as well as equipment & software (see attached table for details). With regard to structures, I would expect the rate of decline to gather renewed downside momentum in the second half of the year. Commercial real estate cycles tend to be relatively long and severe. With commercial property vacancy rates rising and with commercial mortgage lending restricted, it is hard to see that the end of contraction in this sector is remotely near. I am less negative about the outlook for equipment & software spending, but again, with as much excess capacity as is being reported, it is unlikely that the contraction in this sector will end until the fourth quarter.

It takes a little over six months to finish a single-family dwelling once it is started. Single-family housing starts have increased in each of the four months ended June. Thus, residential investment expenditures are likely to continue contracting in the third quarter, before leveling out in the fourth quarter. But the third-quarter contraction is expected to moderate from the second quarter's 29.3% annualized rate of decline.

Despite stepped up government transfer payments to households and reduced federal tax withholdings, real personal consumption expenditures could not manage to post any growth in the second quarter. But the second-quarter annualized decline of 1.2% in real consumer spending was a relative improvement over the second half of 2008's annualized contraction of 3.3%. The federal government's "cash-for-clunkers" program, which is likely to be enlarged from $1 billion to $3 billion, will boost third-quarter motor vehicle sales. But this will be borrowing from future sales. With households still in a pinching pennies mode, with the unemployment rate headed higher and with lenders not exactly falling over themselves to advance households credit, real consumer spending may be nearing a period of stabilization, but likely is many quarters away from a shop-until-you-drop phase.

As we said at the outset, the Commerce Department does not yet have June inventories and net exports data. So, the advance report for these GDP components has to be taken with an even smaller grain of salt than the other components. With this proviso in mind, it was encouraging to see the annualized rate of contraction in real exports slow from nearly 30% in the first quarter to a mere 7% in the second quarter. With a number of developing economies experiencing economic recoveries, such as China, Singapore and South Korea, the change in U.S. exports might break into the plus-column by the end of this year.

Lastly, the volatile swing factor, private business inventories shaved 0.8 of a point off of second-quarter real GDP after buzz-cutting it 2.4 points in the first quarter. Detroit's bankruptcy woes played a role in the continued decline in private business inventories. GM's longer-than-usual summer shutdown this year might hold down seasonally-adjusted motor vehicle inventories in the third quarter, too. But one of these quarters, perhaps the fourth quarter of this year, darned near every business in America will decide to do a little restocking of the shelves, and real GDP growth will skyrocket. Investor beware.

In sum, the worst is over, but the best is not yet at hand. The imminent recovery will take hold not with some sustainable explosion in one sector or another, but because some hitherto really weak sectors will stabilize and/or grow a little.

In addition to providing us with its first guess at the economy's second-quarter performance, the Commerce Department also provided us with some of its new guesses as to how the economy performed in the years 2006 through 2008. As the data below show, economic activity in 2008 was a lot worse than Commerce had previously guessed it was. But a lot of you knew that already.

This revisionism on the part of Commerce is why I like other sources of data, such as the Institute for Supply Management (ISM). Other than annual updates of seasonal adjustment factors, the data provided by this source never get revised. Chart 4 shows that the ISM survey results indicated a very serious economic downturn was underway in 2008. And now the Commerce Department confirms it. I eagerly await what the ISM has to tell us about July economic conditions in its release on Monday, August 3.

Chart 4

Paul Kasriel is the recipient of the 2006 Lawrence R. Klein Award for Blue Chip Forecasting Accuracy

By Paul L. Kasriel
The Northern Trust Company
Economic Research Department - Daily Global Commentary

Copyright © 2009 Paul Kasriel
Paul joined the economic research unit of The Northern Trust Company in 1986 as Vice President and Economist, being named Senior Vice President and Director of Economic Research in 2000. His economic and interest rate forecasts are used both internally and by clients. The accuracy of the Economic Research Department's forecasts has consistently been highly-ranked in the Blue Chip survey of about 50 forecasters over the years. To that point, Paul received the prestigious 2006 Lawrence R. Klein Award for having the most accurate economic forecast among the Blue Chip survey participants for the years 2002 through 2005.

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

Paul L. Kasriel Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules