Q2 GDP Report: 5 Important Things You Need to Know

by: Daryl Montgomery

The Bureau of Economic Analysis reported today that GDP increased by 2.4% in the second quarter. First quarter GDP was revised up to 3.7%. The annual revisions for previous years indicated that the U.S economy contracted at an average annual rate of 0.2% between 2006 and 2009.

While 2.4% is in and of itself a fairly decent increase in GDP, the components that made up the increase are the key to interpreting how good it really is. To do this, it's necessary to know whether or not they are sustainable and even whether or not they are believable. Increases in some components are a negative because they ultimately lead to lower growth in the future. Inventories are the best example of this. Others, such as increased government spending are at best neutral because they don't indicate an improvement in the private economy. If spending isn't going to be increased further in the future, then this also indicates lower GDP going forward. Finally, some numbers simple don't match up with other government reports, observations of reality, or economic definitions. If they don't, they are obviously inaccurate.

So how do the GDP numbers stack up in the latest report? Based on the official news release from the BEA, which can be found here, it can be seen that:

1. Inventory increases added 1.05% to second quarter GDP. Based on the annual revision, they added 2.64% to first quarter GDP or 71% of the total increase. Inventories were also responsible for approximately two-thirds of the GDP increase in the fourth quarter of 2009. The entire economic 'recovery' has essentially been an inventory adjustment. This does not bode well for the future.

2. Government spending was up across the board in Q2. Federal spending increased by 9.2% in the second quarter versus 1.8% in the first quarter. State and local spending was up 1.3% this quarter versus a decline of 3.8% last quarter. The second quarter was when stimulus spending was at its maximum. So expect less of a contribution from government spending to future GDP and lower numbers as a result.

3. The most obvious fantasy figure in the report was the new home construction figure. This supposedly increased by a whopping 27.9%, even though the Commerce Department's New Residential Structures report (more commonly known as new home sales) indicated a 6% decline quarter to quarter and an 8% decline year over year. Nor is there any evidence of a massive increase in new home inventories or any real world evidence indicating a huge building boom. This number is impossible.

4. Somewhat suspicious is the increase in investment on business structures (commercial real estate). This was up for the first time since Q3 2008. The big increase in banks going under that is currently taking place is being caused by commercial loans going bad, yet commercial construction is now on an upswing? Perhaps work on the BP oil spill juiced up this number. Interestingly, the UK also reported a huge increase in construction spending last quarter as well, although there is little evidence of much construction going on there. BP is headquartered in the UK, but it spent its money to handle the oil spill in the U.S.

5. The most ridiculous claim of all was the revised figures for 2008 GDP. Based on original reports, GDP increased by almost 3% in 2008, a very good rate, even though it is universally acknowledge that the U.S. was experiencing the worst economic downturn since the 1930s Great Depression. GDP is supposed to decrease during a recession, not go up. In the revision in July 2009, GDP for 2008 was revised downward to plus 0.4%. In the current revision, GDP growth for 2008 is now listed as 0%. Perhaps after another 15 to 20 revisions it will get to a more reasonable number. The history of 2008 GDP indicates the U.S. can overstate its GDP by a total of 6% to 9% in its initial reporting. Keep that in mind when you read that GDP was up 2.4% last quarter.

Disclosure: No positions.