U.S. In Recession? Not So Fast!

The conventional wisdom that the U.S. economy is in recession (as defined by two or more consecutive quarters of negative GDP) and future GDP revisions would bear this fact out, took it on the chin this morning with the latest revision to second quarter GDP. The Commerce Department’s new second quarter number showed that GDP grew by 3.3% in the spring, up from the 1.9% growth number originally given. While analysts had long expected the spring quarter to show a spike as government rebate checks worked their way into the broader economy, few were forecasting such a robust quarter. Corporate profits also reversed their first quarter decline and eked out a one percent gain. We also received news today that the number of new workers filing claims for unemployment benefits fell slightly last week, as was generally expected. Still, the employment picture does not look good and most analysts predict the number of unemployed to continue to rise throughout the balance of this year, into next. However, employment is a lagging indicator and it is one of the last statistics to turn around during an economic downturn.

The GDP revision is big news. Consensus estimates called for an upward revision to 2.7%, so the actual number buried this forecast. A strong increase in exports helped boost the GDP number. For the second quarter, exports rose 13.2% as opposed to the 9.2% increase originally reported. Imports also fell by a greater than expected number. Both of these developments were clearly triggered by the dollar’s relative weakness.

Surging exports may be the bright spot that helps the domestic economy avoid a statistically-validated recession this year. However, there is some concern that slowing global growth may derail this possibility. The Beijing Olympics are history and China’s infrastructure spending will revert to more normal levels, although reconstructing earthquake-ravaged regions will continue to be a spending driver for some time. The Euro Zone is clearly slowing with the GDP of many major economies now firmly in negative territory. Slowdowns in other parts of Asia and previously hot Latin American economies such as Brazil could dampen exports and choke off the one aspect of the U.S. economy showing promise at present.

Further reviewing the second quarter numbers, residential fixed investment (housing) continued to decline, but not at the meteoric rates seen in the prior three quarters. While it is hard to get too excited over what is still a pretty grim number (-15.7%) this could be a sign that a bottom is beginning to form in residential real estate—at least on a nationwide basis. There are still many markets across the country where the combination of rising foreclosures and a ponderous inventory of unsold homes and condos will take years to work off.

Business spending was a bit better than originally reported; especially noteworthy was a 13.7% increase in spending on structures. Unfortunately, the quarter’s price gauge for personal consumption was shown to jump 4.2% over the first quarter’s rise of 3.6%. Taking out food and energy, the increase was slightly below the first quarter’s number, but still reflects inflationary pressures that merit concern.

Clearly, no one is dancing in the aisles over the bulk of financial data being released these days. Rising loan delinquencies, foreclosures and unemployment bedevil the economy and make headlines far more than reports on good economic news. However, this revision is important as it does show that, despite the doom and gloom reported in the mainstream financial press, we are not technically in recession and—despite future revisions—it is unlikely that economic activity in the second quarter of 2008 will turn negative going forward.

The U.S. economy remains one of the most dynamic and resilient in the world. The rise of a more thuggish, dangerous Russia will only remind people that the American marketplace offers stability and predictability that no other economy on earth offers investors. Despite the challenges that lie ahead, it is hard to bet against the U.S. economy.

Comments

[whidbey:]

Yes, if you play with the inflation data you can appear to be about anything you have the the guts to say. But if the truth matters you need to see that while exports may be encouraging, the real GDP is well south of the data release. Whether that amounts to recession or not is your problem, but things are less than good. Your work is shoddy at best.

2008 Aug 29 09:25 AM

[win:]

I think what Whidbey is trying to say is that there is a large and somewhat fishy difference between Inflation and the GDP deflator used for this past GDP calculation. Your would help your analysis by examining this difference and its effect upon your conclusions.

2008 Aug 30 04:40 PM

[win:]

Sorry, I meant "you" would help your analysis...

2008 Aug 30 04:41 PM