Green Room

Underneath the GDP report

posted at 1:09 pm on July 30, 2010 by

There are at least three sub-stories underneath the reported GDP growth rate of 32.4% for the second quarter of 2010 that we should pay attention to.  (There’s also the revision to GDP for the past three years, but that’s a different story.)

  1. The inventory buildout appears to be ending.  After contributing 2.8% and 2.6% to growth the last two quarters, the rate of increase in inventories — which has buoyed manufacturers — slowed to a contribution of 1.1% this time.  The number I follow more closely on final sales of GDP actually rose a bit, from 1.1% last quarter to 1.3% this quarter.  The contribution of investment in GDP in the 2nd quarter was more from equipment purchases and a surprising gain in housing off of the homebuyer’s tax credit.  But that may have ended already:

    Ryland says that the big question from last quarter’s conference call was what impact the expiration of the tax credit will have on the new home market. Says they found out the answer to that question in Q2, as sales slowed significantly. … Says they knew there would be a slowdown in May once the event passed, but they didn’t expect it to be as severe or prolonged as it’s been…

  2. There was a large surge in imports that dragged on the GDP estimate, along with a subsiding of the impulse from exports.  This may be due to petroleum products being drawn more foreign producers, but the data is not split out well enough for us to know this yet.  What worries me more is the decline in exports: That source of growth is beginning to slide now and create a potential negative impulse for a second downturn in the economy.  At any rate, absorption of goods and services in the US was up quite a bit, but many of those were bought from overseas.
  3. I was more surprised by the reported savings rate of 6.2% than any other number. An economy that is showing vigorous growth and high optimism would have a rate moving lower.  But of course sentiment is down to pre-2010 levels, and consumers appear to have decided to continue the repair of their balance sheets instead.  This makes business investment all the more important to growth, if you can get that without the small businessman who has checked out on the recovery.  Even larger firms are turning sour in July.

All of this will turn up the heat on Congress, which is now hearing in a new report that letting the Bush tax cuts expire would cause GDP to fall 1.1% in 2011.  (If you are going to say the Obama stimulus added to GDP, you sorta need to say as well that a tax increase cuts GDP, don’t you?)  There appears to be no impulse left on the demand side that would lead the next leg of the recovery; uncertainty seems also to be holding back supply.  Ed calls this “a political disaster for Democrats,” but one major way out of the problem — use monetary policy — seems on hold despite one Fed president’s call for more leniency.  A different one is asking the Congress and Obama Administration for less “random refereeing“, but that is the source of its power.

You will be able to hear more about the report on the King Banaian Show, starting at 9am CT Saturday on KYCR, AM 1570 in the Twin Cities.

(Crossposted at SCSU Scholars.)

UPDATES (31 July) Thanks Ed for the promotion, and to Glenn Reynolds for linkage. See this from Christina Romer’s post yesterday as well:

The data revisions, together with recent estimates, also provide some important new information about longer-run trends. Revisions to both personal income and consumer spending have led to estimates of the personal saving rate in 2008 and 2009 that are substantially higher than previously reported. The average saving rate in 2009, for example, is now 5.9%, 1.7 percentage points higher than previously reported. In 2010:Q2, the saving rate is 6.2%. This higher saving rate is consistent with estimates reported in the Economic Report of the President of likely consumer behavior in the wake of the financial crisis. The higher level also suggests that there is room for further consumer spending growth as consumers become more confident, without returning to the very low saving rates of the past decade.

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Ed Morrissey on July 31, 2010 at 3:19 AM