GDP Report Pointed to Across-the-Board Economic Slowdown

by: Anonymous Investor..

The Bureau of Economic Analysis [BEA] released the Advanced Q2 GDP report on Friday morning: Real gross domestic product [GDP], the most comprehensive measure of economic activity, increased 2.5 percent in the second quarter after increasing 5.6 percent in the first quarter.

A first view reveals that growth rates for all the components of GDP have simply been downsized.

gdp contribution

Consumer spending, which accounts for more than two-thirds of the economy, contributed 1.74 percent to the real GDP growth in the second quarter compared to a contribution of 3.38 percent in the first quarter. For the first time since Q1 in 2003, residential construction drained 0.4 percent from Q2 GDP growth after it exhibited a gradually decreasing contribution in the previous three quarters. Last year, for example, residential construction contributed about a sixth of the total 3.2% in real GDP growth. For the first time in a year, net exports made a positive contribution to GDP growth. Unfortunately, this was caused by a decreased drain of imports and not by a large increase in the distribution of exports. Exports' contribution to the real GDP has in fact decreased from 1.41 percent in the first quarter to 0.35 percent in Q2.

Fed Chair Ben Bernanke has expressed hope that:

Investment in nonresidential structures, which had been weak since 2001, seems to have picked up appreciably, providing some offset to the slower growth in residential construction...Growth of the global economy will help support U.S. economic activity by continuing to stimulate demand for our exports of goods and services.

But with nonresidential investment contributing +0.28 percent to real GDP in the second quarter, residential investment -0.4 percent and exports +0.35 percent, it seems safe to say that Bernanke's optimism does not find much confirmation in the latest GDP numbers.

The low consumption number could be due to decreasing Mortgage Equity Withdrawals [MEW], which seem to have had a strong impact on the GDP in the last 5 years. However, MEW numbers for the second quarter will be available at the earliest on September 14th, when the FED's flow of funds report is published.

As James Hamilton points out, the GDP growth in the first quarter was so strong that it brought the recession probability index down from 7.1 percent for previous quarter (Q4 2005) to 3.4 percent for the first quarter in 2006. This index is not a forecast of where the economy will be later this year, but is a backward-looking assessment of where the economy was as of Q1 in 2006, using the latest data to form that assessment. Background on how the recession probability index is constructed and a review of its historical performance are available here.