GDP Data: Stronger Than Financial Headlines Suggest

by: Ron Haruni July 31, 2008    

Ron Haruni

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The Commerce Department reported on Thursday that real gross domestic product increased at an annual rate of 1.9 percent from April to June fiscal ‘08, versus a consensus expected 2.3%. Expansion in the second quarter, though 0.4% lower than expectations - outpaced the Q1′08, when the economy grew at a 0.9 percent annual pace.

The increase in real GDP in the second quarter primarily reflected positive contributions from exports which added 2.4 points to the real GDP growth rate. Real exports of goods and services increased 9.2 percent in the second quarter, compared with an increase of 5.1 percent in the first. The weak dollar has made U.S. goods cheaper to foreign buyers, helping to bolster exports.

The largest change on real GDP was noted in the inventories. The category subtracted 1.92 percentage points from growth after subtracting 0.02 percentage point from the first-quarter change. Private businesses decreased inventories $62.2 billion in the second quarter, following decreases of $10.2 billion in the first and $8.1 billion in the fourth.

Real final sales of domestic product (GDP less change in inventories) grew at 3.9% rate in Q2′08, compared with an increase of 0.9 percent in the first. Real final sales are up 2.4% yoy basis.

Home building was a drag as expected, subtracting 0.6 points from GDP growth in Q2, the smallest drag from this sector in a year. It fell at a 15.6% annual rate, down from about 25% the previous three quarters. Meanwhile, software was weaker than anticipated, knocking off 0.25%, while nonresidential construction added 0.25%. GDP price index rose at a 1.1% annual rate in Q2′08.

Today’s GDP report, despite posting lower than expected results,shows a real economy that is functioning, and it’s managing to expand despite its troubles. If we exclude the massive decline in inventories, which we believe are overstated and likely to be subject to upward revisions, we get real final sales growth at a 3.9% annual rate.

As we have stated before and continue to reiterate - these numbers are not recessionary. Any aspiration of experiencing a U.S. economy engulfed by a severe recession, is plainly delusional. While the economy is not growing at its full potential, we can’t argue with the fact that no matter what - it's still growing.

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This article has 5 comments:

  •  
    Jul 31 08:12 PM
    GDP deflator 1.1% because of some quirks

    Even if we apply the official cpi 5.1% we're in deep recession!
    And it's with stimulus!
    Actually i think depression is guaranteed at this point
    Reply | Link to Comment
  •  
    Jul 31 09:47 PM
    We have lost jobs 7 months running and 4th quarter GDP was negative . If anyone is delusional its you .
    Reply | Link to Comment
  •  
    Aug 01 12:08 PM
    Correct Dmitri, but 3-4 years out. Economy will level a bit from the deep dips of March and June market crashes. The liquidity swamp is being drained and this was necessary, albeit very painful. We will see quarters of growth, but more quarters of GDP shrinkage for the next few short years. It's a cumulative effect. Q4 2008 should actually be somewhat decent. False optimism during election season and some true pent up demand from other prior quarters should reveal itself. All said, there is major opportunities in such a downturn. Energy, health, tech (efficiency sort), agr, metals, higher ed might be places to explore. Housing is getting cheap also if you buy mid next year and hold or rent out for a private investor.
    Reply | Link to Comment
  •  
    Aug 02 03:47 PM
    How can you ignore the ridiculous inflation assumption? Ignoring the obvious does no good. This economy is hurting.
    Reply | Link to Comment
  •  
    Aug 04 03:47 PM
    I respectfully have to disagree. The 1.1% inflation rate is based on how the govt. calculates GDP = C + I + G + (X - M). If we add imports into the equation (check BEA #), nominal growth registers at 5.5% Q2'08 annual rate, then using 4% inflation rate means real GDP growth equals still 1.5% positive territory. We shouldn't confuse CPI with GDP inflation measures.

    As far as the revision of Q4'07 goes....many are finding it convenient not to mention that the govt. added a full point to real GDP growth in Q2'07 prompting an impressive 4.8% real GDP growth annual rate.

    Payroll employment: the monthly job losses in fiscal '08 – at 73K per month are not large enough to suggest the U.S. economy is in recession let alone depression. If we get 140K+ job losses per month then there is some validity to the argument. Additionally, productivity is growing at an average 2.5% annual rate which is nowhere near recessionary levels.

    These numbers in my view and other data left unmentioned here, are not indicative of recession, granted the economy is sluggish, but growing nonetheless.

    Outside of housing and banking, reasonable economic stability and corporate profit growth is evident. I have to agree however, it is hard to keep an objective perspective with all the negative financial headlines.
    Reply | Link to Comment
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