The View From Friday's GDP Report

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 3.4 percent in the second quarter of 2007, according to advance estimates released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.6 percent.

As I have discussed in the past, the estimates get revised several times, including up to several years later. According to the BEA:

The estimates released today reflect the annual revision to the national income and product accounts (NIPAs), beginning with the estimates for the first quarter of 2004. Annual revisions, which are usually released in July, incorporate source data that are more complete, more detailed, and otherwise more reliable than those previously available. This release includes the revised quarterly estimates of GDP, corporate profits, and personal income and provides an overview of the effects of the revision.

In other words, it is time to go back and revisit everything that has been written about GDP over the past three years because it was based on incomplete information. Or at least base new observations on the newly updated tables.

Friday’s report has been billed as strong. Said Reuters:

Economic growth rebounded during the second quarter to its strongest pace since the beginning of last year on a surge in business investment, more government spending and a better trade performance.

But keep in mind, the headline report is the earliest (and least reliable) data, is adjusted for seasonal impacts and annualized, all of which require assumptions from the same officials who will spend the next three years revising them. As usual, I prefer to look at the data without seasonal adjustments and compare it to the previous year to eliminate at least some of these assumptions. And on that basis, while the quarter looked a bit stronger than last, it is far from looking like the strongest in anything more than one quarter.

click to enlarge

Looking at how the GDP figures were generated is also interesting. Personal consumption finally slowed, as many have been predicting. The traditional story is that it would be replaced by business investment (private direct investment in the chart). While PDI was at least positive this time, it didn’t make up for even half the decline in consumption. Instead, government spending accounted for 0.82% of the reported rise in GDP. The change in net exports contributed more than a percent - due in part to increased exports but also to decreased imports (which is also reflected in personal consumption).

As expected, residential investment continues to be weak.

However, it is acting as less of a drag on GDP, at least directly.

All in all, the report was not as strong as the headlines suggest. There were some improvements from last quarter, but it looks far too early to be calling a bottom.

Comments

[Sr. Pessimist:]

That's easy to believe. I think there is a lot of pressure for more "real" value in stuff people make and do, so all the opportunities to do what the corps aren't doing is opened up.

2007 Jul 29 10:08 AM

[Quaker:]

When was the last time GDP was revised up? IMO, GDP will start to really fall in the fourth quarter. This is when contagion from the mortgage markets makes it's way into credit cards and financing for boats, Harley's, motor homes and cottages.

Economics is the science of deception. 2 and 10 average to 6. So does 5 and 7. Add hedonic adjustments and seasonal adjustments and you have worthless blather.

Almost all of my elderly clients (accounting firm) have multiple homes and virtually ALL are selling one. Either a Florida or a NY. Almost all have leveraged motor homes and multiple cars. All the "home value" statistics tell you is that as sales fall, prices are being concentrated around the national average for mortgage loan approval based on wages. (As if we needed analysis to see that was going to happen. This has nothing to do with actual price.

The cottage industry is going to get DEMOLISHED. Cottages are the ultimate Alt-A, subprime. Nobody... and i mean NOBODY can even imagine summer home prices will fall. Not owners, not bankers.

But simultaneoulsy, we are going to get a bloodbath in sales of motor homes, harleys, ski-doo's.

When marina's are stuffed with unsellable fishing traulers and banks are repoing lake front property by the neighborhood, BEA will still be saying GDP is going up 3.4%.

2007 Jul 29 12:49 PM

[gordon:]

Many studies show the CPI is understated by 2.4%, so inflation is about 6%. That means the GDP is a fraud. If you take out 9.5% in defense spending, and realize the increase in exports was probably this military-industrial payola (of which Bush wants $20 bill more, another promise to his base before leaving office), and realize imports slowed because consumer spending is dropping, it's hardly a pretty picture. Here in Calif we created 400 June jobs! Take out gov't jobs, it was NEGATIVE. June 2006 employment created over 26,000, meaning housing-related jobs are literally falling off a cliff.

2007 Jul 29 03:10 PM

[wixeywaxy:]

I think the thinking public takes government bureaucrat generated numbers with a grain of salt. The media presents them to us as credible, but even if you believed they are trying to present honest data the practical problem is beyond their capacity. Government doesn't do anything very well is the simple fact. Why isn't there any independent organizations generating data, a cost of living index for example? Vic

2007 Jul 29 08:26 PM

[gordon:]

there is an independent M3 money supply data firm now, it's running @14% annual.

2007 Jul 30 11:51 AM