Latest GDP Revision Brings Mixed Message For Elections: Economy Weak, Corporate Profits Strong

by: Ed Dolan

The revised third estimate of GDP for Q2 2012, released Thursday by the Bureau of Economic Analysis, carries a mixed message for the election campaign.

The revised data show real GDP growing at an annual rate of just 1.3 percent in Q2, down from the already weak 1.7 percent of the previous estimate. The slowdown supports the GOP contention that the economy as a whole remains weak despite the Obama team's efforts.

At the same time, corporate profits after taxes grew faster than previously estimated. They continued to grow faster than the economy as a whole and remain near the all-time highs reached later last year. Taxes paid by corporations actually fell in the second quarter while total profits grew. All of those data bolster the Democratic narrative that corporate managers and shareholders are doing quite nicely, thank you, while the rest struggle. True, economic policy needs a tune-up, but are tax cuts for wealthy "job creators" really what we need most?

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Click to enlargeLower than previously reported consumption and investment accounted for most of the downward revisions to growth between the second and third estimates. The contribution of personal consumption expenditure to growth was 0.17 percentage points lower than reported earlier. Gross private domestic investment, which was earlier reported to have contributed 0.4 percentage points to growth, contributed a bare 0.09 points according to the third estimate. Fixed investment, led by business equipment and software, contributed 0.56 percentage points to growth but that was largely offset by a drop in inventories. The raw data do not tell us whether the decrease in inventories was "unplanned," reflecting a faster growth of sales than businesses anticipated, or "planned," reflecting a gloomier outlook regarding future sales.

The government sector continued to shrink in Q2, although not quite as rapidly as previously reported. Almost all of the decrease was in state and local government. The long decline in the contribution of the federal government to GDP slowed to just -0.02 percentage points, according to the third estimate.

Exports, which have been a bright spot throughout the recovery, held up well. Without the growth of exports, the growth rate of GDP would have been 0.72 percentage points lower, which is to say, GDP would hardly have grown at all. Imports also grew, but not as fast as exports. Net exports, on balance, contributed 0.23 percentage points to GDP growth in the quarter.

As shown in the next chart, nominal GDP grew at a very weak 2.8 percent annual rate in Q2, down sharply from the 3.3 percent reported in the second estimate. That is far below the long-run trend for NGDP growth of about 4.5 percent. That means the gap between actual and potential NGDP, already large, widened further in Q2. Although the Fed has not adopted NGDP as an official target, slow nominal growth and low inflation were clearly factors behind the Fed's recently announced program of renewed quantitative easing.

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There will be one more GDP data release before voters go to the polls, the advance estimate for Q3, due October 26. Unless the race is extremely close or Q3 data show a very sharp break in the trend, they are unlikely to influence the outcome of the election. By that time, only those of us who are true data junkies will be watching.