Q2 GDP Reveals Continued Stagnation

The Advance Estimate of GDP for Q2 2011 was +1.3%, and Q1 2011 was revised downward to +0.4% from the previous +1.9%.

As readers here know, we believe GDP is a flawed measure because it is just a tally of spending which doesn’t account for changes in money supply, such as from QE1 and 2. And spending alone does not give us a very good picture of the economy. For example, a decline in government spending would be a positive in our book, but it is seen as a negative, reducing GDP. And in an economy suffering from a huge boom-cycle debt hangover, rising savings rates and decreased consumption will only help to pave the way for future growth.

This report contains changes to past reports to reflect annual revisions using what the Bureau of Economic Analysis feels is more accurate data. This is the subject of much controversy. 

Regardless, GDP is a measure of something and the data is useful in measuring the relative performance of sectors of our economy. Industrial production, capital spending, and the like are currently the most important factors in the economy and we need to know what is happening to give us a picture of real economic growth. 

Here is the big picture:

As you can see, the economy has been stagnating for the past year as we had forecast early last year. In our opinion this stagnation is not a “soft patch.”

Here are the highlights of the BEA report:

The acceleration in real GDP in the second quarter primarily reflected a deceleration in imports, an upturn in federal government spending, and an acceleration in nonresidential fixed investment that were partly offset by a sharp deceleration in personal consumption expenditures.

 Motor vehicle output subtracted 0.12 percentage point from the second-quarter change in real GDP after adding 1.08 percentage points to the first-quarter change.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 3.2 percent in the second quarter, compared with an increase of 4.0 percent in the first.  Excluding food and energy prices, the price index for gross domestic purchases [(Core)] increased 2.6 percent in the second quarter, compared with an increase of 2.4 percent in the first.

Real personal consumption expenditures increased 0.1 percent in the second quarter, compared with an increase of 2.1 percent in the first.

Durable goods decreased 4.4 percent, in contrast to an increase of 11.7 percent. Nondurable goods increased 0.1 percent, compared with an increase of 1.6 percent. Services increased 0.8 percent, the same increase as in the first. Equipment and software increased 5.7 percent, compared with an increase of 8.7 percent. Final sales of computers added 0.15 percentage point to the second-quarter change in real GDP after adding 0.08 percentage point to the first-quarter change.

Real exports of goods and services increased 6.0 percent in the second quarter, compared with an increase of 7.9 percent in the first. Real imports of goods and services increased 1.3 percent, compared with an increase of 8.3 percent.

Real federal government consumption expenditures and gross investment increased 2.2 percent in the second quarter, in contrast to a decrease of 9.4 percent in the first. National defense increased 7.3 percent, in contrast to a decrease of 12.6 percent. Nondefense decreased 7.3 percent, compared with a decrease of 2.7 percent. Real state and local government consumption expenditures and gross investment decreased 3.4 percent, the same decrease as in the first.

The change in real private inventories added 0.18 percentage point to the second-quarter change in real GDP after adding 0.32 percentage point to the first-quarter change. Private businesses increased inventories $49.6 billion in the second quarter, following increases of $49.1 billion in the first quarter and $38.3 billion in the fourth.

Real final sales of domestic product — GDP less change in private inventories — increased 1.1 percent in the second quarter, after increasing less than 0.1 percent.  Real gross domestic purchases — purchases by U.S. residents of goods and services wherever produced — increased 0.7 percent in the second quarter, the same increase as in the first.

Disposition of personal income–Current-dollar personal income increased $132.5 billion (4.2 percent) in the second quarter, compared with an increase of $251.9 billion (8.3 percent) in the first.

Disposable personal income increased $109.9 billion (3.9 percent) in the second quarter, compared with an increase of $129.6 billion (4.7 percent) in the first.

Real disposable personal income increased 0.7 percent, the same increase as in the first quarter. Personal outlays increased $83.5 billion (3.1 percent) in the second quarter, compared with an increase of $153.5 billion (5.8 percent) in the first.

The personal saving rate — saving as a percentage of disposable personal income — was 5.1 percent in the second quarter, compared with 4.9 percent in the first. 

The most important trends are the declines in gross domestic private investment, up 7.4% in the first quarter, but it declined to +3.1% in Q2.

What is especially interesting is that computer purchases, equipment, software have all stalled or have declined. As we pointed out previously, this may be a trend that corporations are winding down their efforts at technological and other efficiencies; perhaps this has reached a peak for this cycle.

There are two things to keep in mind about the above data. One is that the reduction of federal spending is a positive. The other is that the GDP concept of exports vs. imports is an incorrect assessment based on mercantilistic assumptions about the “national economy.” In fact imports and exports are good for the economy.

The positive note in the data is that the personal savings rate of households increased back up to 5.1% from 4.9% in Q1. Consumer time preferences are pretty obvious: they aren’t spending and are doing the rational thing: stashing cash and reducing debt.

Here is a chart of the price inflation we are not supposed to be having:

By all measures, the economy is stalling out and prices are rising.

The response from most economists was an expected general gloom. Very few anticipated this stall out and inflation (stagflation). I urge you to check out the round-up of comments reported in the Wall Street Journal.

The real question is: what will the Fed do. As we have been saying for some time now, we believe the Fed will respond to political pressure to do something. And that something is QE3:

Slow growth is likely to intensify discussions about whether the central bank can do more to support growth. “If the recovery stalls and inflation remains low or deflationary pressures reemerge, then we may need to keep our very stimulatory policies in place for quite some time or even increase stimulus,” San Francisco Fed President John Williams said in a speech Thursday.

Until the debt from the huge malinvestment in real estate during the boom cycle is resolved, we believe the economy will continue to stagnate, despite whatever steps the Fed or the government take.