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New GDP Release Brings Both Good and Bad News


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First, growth in the second quarter of 2011 came in at an anemic 1.3% pace. The slowing was largely driven by consumer spending, which hardly grew at all. The good news is that the factors that were negatively influencing consumers—namely high energy prices and supply chain disruptions in the auto industry—have started to fade. As such, the U.S. consumer should come bounding back in the second half of the year—driving growth back up to normal levels.

There was other good news in the report. Business investment outperformed what we at Beacon Economics had expected, with overall spending continuing its slow return to normal levels. The mild rebound in investment in residential and non-residential structures outweighed the slight slow down in investment in equipment and software. And the trade deficit started to close again, driven mainly by continued strong growth in exports. Lastly, while state and local government remained a drag on growth, unexpected bumps in state revenues should start to reverse this trend in the second half of the year.

 

 

Beacon Economics Forecast

BEA Initial Estimate

Gross domestic product

2011Q2

2011Q2

 

1.40

1.30

Personal consumption expenditures

0.30

0.07

Durable goods

-0.40

-0.35

Nondurable goods

0.10

0.02

Services

0.60

0.40

 

 

 

Gross private domestic investment

0.30

0.87

Structures

0.20

0.20

Equipment and software

0.00

0.41

Residential

0.00

0.08

Change in private inventories

0.10

0.18

 

 

 

Net exports of goods and services

1.30

0.58

Exports

0.80

0.81

Imports

0.50

-0.23

 

 

 

Federal

-0.50

0.18

State and local

0.00

-0.41

The second big thing that came out in today’s GDP release was a major revision in the path of the recession and the recovery.

Growth in the first quarter of this year was revised all the way down to .4%, This is a fairly sharp change, considering that the last three looks at first quarter GDP growth all pegged that figure in the 1.8% to 1.9% range. The downturn occurred within two parts of the data that are hardest to measure—real business inventories and trade flows. Inventories had not been accumulating as fast as originally thought. The revision took growth down a full percentage point. And real imports grew faster than first measured, accounting for the other half percent.

Gross domestic demand – the sum total consumption of businesses, households, and the government – remained the same, however. Ultimately this is a better indicator of the underlying strength in the economy. And importantly while growth in the first quarter was slower, growth over the previous three quarters was actually stronger. In aggregate, growth from the second quarter of 2010 to the first quarter of 2011 remained the same. The growth spurt was just moved earlier in the year.

More significant were the revisions made even earlier in the data. The 2008-09 recession is now estimated to have shrunk the U.S. economy by 5.1%, as opposed to the original estimate of 4.1%. This doesn’t sound like a big change—but keep in mind the worst downturn the U.S. economy has suffered through since the Second World War was in the mid 1970s when the economy shrunk by 3.1%. It also helps explain the enormous loss of jobs. This deeper downturn was driven by greater declines in business investment and consumer spending.

The bad news is that the production hole the U.S. economy is currently trying to dig its way out of is now that much larger. In past recessions the U.S. economy returned to its long run trend line within 2 years of the end of the recession. This time we are two years out and are still as far from the trend line today as we were at the economic trough in the second quarter of 2009. Indeed economic output is still below the previous peak.

The silver lining here is that the U.S. consumer is now seen to have reduced to consumption by even more than originally estimated. This is good news because excessive consumer spending was the root cause of the recession. We now seem to be closer to a stable pace of spending than before—which brightens our view of the future. But it is clear that the 2008/09 recession has done something that no previous recession has—it has permanently altered the long run path of U.S. economic output for the worse.

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CATEGORY: General Economy



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