Q2's GDP Revised to 3.3%, A Hefty Increase

The government just revised second-quarter GDP to 3.3% from the original 1.9%. That's a pretty hefty increase.

Record exports and the temporary stimulus from the tax rebates prevented the economy from stalling as housing slumped and companies cut expenditures. Consumer spending is now waning and slower growth abroad dims the outlook for foreign sales, signaling last quarter will be the year's highpoint.

"Outside of trade, the economy is considerably weaker," said Carl Riccadonna, an economist at Deutsche Bank Securities Inc. in New York. "When you look at the spending, it looks terrible for the second half of the year."

I'm not too interested in the debate of, "are we or are we not in a recession." Consider, however, a few facts.

Imports have now declined for three straight quarters, and four of the last five.

Fixed investment has declined for four straight quarters.

Residential investment has fallen for 10 straight quarters.

Comments

[JasonC:]

Non-residential fixed investment is booming as residential contracts. Final goods are operating at a low 77% of capacity, with essentially all the capacity increase over the last year simply not being utilized yet, while on the other hand primary production cannot expand fast enough, and is operating at 90% of capacity. These are both classic signs of required shifts to correct a past misallocation of capital, based on unsustainable prices for residential real estate and the consumption goods that stock them.

The sleeper bombshell in the BEA report, however, is a line that no one seems to have noticed or to be talking about. "Domestic profits of financial corporations increased $24.7 billion in the second quarter, compared with an increase of $37.3 billion in the first. Domestic profits of nonfinancial corporations decreased $46.9 billion in the second quarter, compared with a decrease of $32.1 billion in the first."

That's right Virginia, it is US non-financials that have falling profits in the aggregate, while the financials are making more money now than in 4Q2007.

The other clear trends are booming exports, while imports are starting to collapse, and an inventory runoff, not an excess build. Inventory subtracted 1.5% from the GDP figure. These are signs that foreign capital became scarce and the economy is adjusting the external deficit. Violently. At the present rate of change, the huge $700 billion a year trade deficits we saw at the peak of the bubble, will go to zero within 18 months.

Those deficits reflect the record low savings rate domestically more than they do terms of trade with the world. Investment in the US was being funded by foreign rather than domestic savings. That has already slowed by half, and may disappear entirely in this downside of the cycle, as US households correct their recent overreliance on real estate equity financing in favor of savings out of income.

The income for it is there - the overall economy is showing great strength and adaptability. We still have a ways to go making this adjustment, but in less than 2 years everything will be in place for renewed growth on a much sounder basis.

The endless doom-mongering predictions of the collapse of capitalism and the end of America will be exposed as vacuous piffle by, at the latest, mid 2010.

2008 Aug 28 03:50 PM

[mouse:]

Don't forget the ridiculous inflation number they used to get the 3.3% growth number. If you don't subtract the real inflation number, growth looks great!

2008 Aug 28 06:00 PM

[JasonC:]

CPI and GDP deflator aren't the same thing, because consumer goods are not the entire economy. In the second quarter, three of the biggest developments were surging exports, large investments in commercial real estate, and a huge run off in business inventories. The price levels affecting those are not the CPI, but the level of the dollar, real estate valuations, and inventory adjustments respectively.

Indeed, the role of the consumer in the economy has to fall - that is what the unsustainable trade deficit and zero net savings rate were saying. That adjustment is now well underway. CPI is a lagging indicator anyway.

2008 Aug 28 06:07 PM

[JC:]

I've heard Jim Rogers say over and over "you can't trust the government" and these revisions going into the presidential election make me believe him. These numbers are as unbelievable as the inflation numbers. Are you going to believe me or your lying eyes?

2008 Aug 28 06:35 PM