Clear as Mud
Raymond James
Scott Brown
August 3, 2010
Real Gross Domestic Product rose at a 2.4% annual rate in the second quarter, roughly matching expectations. The details, however, were a mixed bag. Imports rose at a 28.8% annual rate, subtracting 4.0 percentage points from the headline growth figure. Domestic Final Sales, which exclude inventories and net exports (and are a better measure of underlying domestic demand), rose at a 4.1% pace, the best showing since 1Q06. Corporate profits have rebounded significantly in recent quarters, providing solid support for business fixed investment. However, consumer spending, at a 1.6% annual rate, was relatively lackluster – positive, but not nearly as strong as we’d like to see. The personal savings rate rose in 2Q10 (and previous figures were revised significantly higher), consistent with near-term restraint in consumer spending growth. Inventories rose at an even faster rate in the second quarter, and while these data will be revised, the pace is unsustainable, consistent with a near-term moderation in manufacturing. In short, the GDP report suggested what many had already suspected – that the recovery has slowed.
Annual benchmark revisions to the GDP data did not change the picture much. The recession was somewhat worse than anticipated, with sharper declines in the second half of 2008.
One of the major concerns of the recession/recovery was that consumers would significantly increase their savings. If so, the pace of economic recovery would be more gradual. The government does not measure household savings directly. Revisions are often large. The latest benchmark revisions showed higher savings rates in recent quarters than were reported earlier. A 2Q10 increase is consistent with the recent lackluster pace in consumers spending.
Having undergone a substantial correction into the early part of this year, inventories were expected to rise roughly in line with final sales, but the second quarter pace was well above that, suggesting that some of the accumulation was unintentional. That, in turn, is consistent with recent reports of more mixed conditions in the manufacturing sector. Recoveries are typically uneven. There’s nothing in the GDP report to suggest a double dip, just a near-term slowdown in the pace of growth. The July Employment Report will add further to the economic picture.
(c) Raymond James
