2nd Quarter GDP - Weaker In All The Wrong Places
The first estimate of the 2nd Quarter GDP was released at a 1.5% annualized growth rate which was just a smidgen better than the 1.4% general consensus. I said last night on the radio program that this was likely to be the case as the first estimate is based on the consensus estimates as the BLS does not have enough final data to begin making more concrete assessments. Included in today's release of GDP were the annual benchmark revisions to the data going back to the first quarter of 2009.
The first chart shows these revisions as a percentage of the original GDP estimate. What we now know is that the economy was much weaker than originally estimated from the 2nd Quarter of 2012 through the 3rd Quarter of 2011. In fact, the annualized growth rate of GDP in the Q1 of 2011 was only 0.08%.
In our last discussion on GDP we discussed that the fourth quarter of 2011 showed much of the strength was due to the impact of the unseasonably warm winter that boosted construction spending. Capital expenditures also received a boost as business made investments to receive the tax credit that was due to expire at the end of the year. Consumers picked up the charge (cards) in the first quarter of 2011 as lower utility bills from the warn winter provided an effective tax credit and loosened up wallets. Our concern has been the sustainability of the spending by businesses and consumers in the face of stagnant wage growth and slowing end demand.
In the first estimate of Q2 GDP it was Gross Private Domestic Investment that carried the day by rising modestly from .78 to 1.08. Improvements were seen in Equipment and Sofware (rising from .39 to .51) and a build in Inventories, rising from -.39 to .32 which is likely unwanted given the recent slowdowns in new orders. However, every other category declined with Fixed Investment dropping from 1.18 to .76, Non-Residential Investment falling from .74 to .54, Structures fell .35 to 0.03, Residential Investment slipped by almost 50% from .43 to .22 even as the media touts a housing recovery.
We wrote previoulsy that this is no longer "our father's economy" as the shift from a manufacturing to service based economy, combined with globalization, have led to new drivers of the domestic economy. As we showed previously, despite hopes from the mainstream media, housing and automobile production are no longer the drivers of the domestic economy that they once were. Residential investment is now comprising only 2.59% of GDP while Automobiles make up 2.9%. Combined, these two former economic powerhouses still do not make up as much of GDP as Equipment and Software. The ravenous quest by businesses to increase productivity, and lower costs, in order to maintain profitability in a sub-par growth environment is evident.
Furthermore, globalization has led to a much greater dependence on the exportation of goods and services. Many have dismissed the slowdown and recession we are witnessing in the rest of the world and believe that the U.S. can remain an island of strength. While it is possible, given enough artificial support and intervention, the reality is that exports make a huge part of corporate profitability. Exports have accounted for fully 41% of rebound in the economy post the last recession which is far outside the norm. The effect of declining wage growth, excess debt and the lack of availability of credit - the U.S. consumer has remained suppressed on many levels while the economy disproportionately gained traction from foreign markets.
As we continue to dig down into the numbers we previously questioned the sustainability of the consumer. In the latest report on the economy Personal Consumption Expenditures (PCE) decreased from 1.72 in Q1 to 1.05 in Q2. Furthermore, PCE has fallen from almost 3% in 2010 to the same level that we last saw in the third quarter of 2011.
Services rose from .61 to .87 in the latest report which support the recent increases in employment which has been primarily temporary and lower wage paying jobs. However, as witnessed by the continued slate of weak manufacturing reports showing slowdowns in new orders, Goods declined from 1.11 to just 0.18, Durable Goods fell .85 to -.08. Non-Durable goods, items purchased by consumers with an expected life span of 3 years or less, like clothing, remained fairly stagnant slowing from .26 to .25. This weakness will most likely increase in the next estimate given the 4.6% decline in the most recent durable goods report, ex-civilian aircraft and defense, which shows the consumer is continuing to struggle.
Real Final Sales
Real Final Sales improved marginally in the 2nd quarter by .31% which was slower than the .44% increase in Q1. However, the index still remains mired at recessionary warning levels. In the past, every time real final sales, on a year-over-year basis, has fallen below a 2% growth rate, currently at 1.87%, the economy has either been in, or was about to be in a recession. Since the end of the last recession in 2009 - real final sales have been below 2% growth 10 out of the last 12 quarters. That is unprecedented to any other time in history. Normally, 12 quarters post a recession, real final sales are growing at an average of 3.89% not 1.87%.
Due to the continued effect of declining wage growth, see recent NY Times article showing median family incomes now 6% lower than in 2000, excess debt and the lack of availability of credit - the U.S. consumer has remains under pressure. With the disproportionate dependence on foreign markets for consumption - the impact to the U.S. economy has been one of sub-par growth.
This sub-par growth is shown most clearly by the output gap which is the difference between Real GDP and the Potential GDP. Currently, the output gap is running at $775.3 Billion, or 5.41% of GDP, which is the greatest level in three quarters. The current level of the output gap relative to GDP remains at levels historically associated with recessions. This is clearly not an economy on the path to recovery but one that is still statistically growing through artificial interventions and support. Of course, this also explains why it took more than $2 of debt in the current quarter to create $1 of economic activity - a trend that is clearly unsustainable long term.
GDP Out Of Recession Zone Due To Revisions
There is one bright spot in the report due to the current revisions. We have previously reported that the economy had remain mired at a sub-2% annualized growth for 4-quarters in a row without being in a recession. In past history this has NEVER occurred...until now. Due to the revisions to the data the domestic economy grew at a 2.45% annualized rate in the first quarter of 2012 and has slowed to a 2.21% growth rate in the second.
It is apparent that the successive rounds of fiscal stimulus, bailouts, interventions and injections have kept the economy from succumbing to a statistical recession. Of course, there are those 65% of Americans who currently believe we are in a recession already as they struggle to make ends meet.
No Recession For Now
There has been a rising chorus of calls as of late that the economy is already in a recession. For all intents and purposes that may well be the case but the GDP numbers do not currently reveal that. What we are fairly confident of is that with the weakness that we have seen in the recent swath of economic reports is that the 2nd quarter GDP will likely be weaker than reported in the first estimate.
It is this environment, combined with the continued Euro Zone crisis and weaker stock markets, as the recent rumor induced bump fades, that will give the Federal Reserve the latitude to launch a third round of bond buying later this year. While the impact of such a program is likely to be muted - it will likely push off an outright recession into next year.