Friday, August 27, 2010

Q2 GDP Up Only 0.7% Without Government Spending

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

The Bureau of Economic Analysis revised second quarter GPD growth down from 2.4% to 1.6% today. Stimulus spending peaked in the second quarter and despite the big boost that it provided, the U.S. economy only expanded at a rate that indicates the U.S. standard of living isn't declining further.

The U.S. needs GDP growth (adjusted for inflation) at about 1.5% for the well-being of the average person to remain the same. This is because of population increases and other factors including some overstatement of the numbers. Actual growth, meaning more jobs and increased incomes for the American people, only takes place when the GDP number is above that level. The U.S. right now needs a substantial amount of actual growth just to make up for the decline from the Credit Crisis/Great Recession and to get back over eight million lost jobs. Despite $2.7 trillion in federal deficit spending in the last two years, it's just not happening.

At the bottom of the Credit Crisis/Great Recession GDP declined at a 6.8% annual rate. So far during the 'recovery' GDP growth has been:

2009 Q3  1.6%
2009 Q4  5.0%
2010 Q1  3.7%
2010 Q2  1.6%

Most of this has come from changes in inventories -in the first three quarters, approximately two-thirds of 'growth' came from this one factor. Indeed this also would have been true of the Q2 number as well if the inventory component hadn't been lowered. Inventories for Q2 were originally reported as being responsible for GDP growth of 1.05% (divided by the new 1.6% total, this would indicate inventories were 66% of Q2 GDP growth). However the inventory contribution to GDP was revised downward even though according to the BEA, "Private businesses increased inventories $63.2 billion in the second quarter, following an increase of $44.1 billion in the first quarter". The smaller increase in inventories in Q1 was responsible for GDP increasing by 2.64%. This is a peculiarity of GDP math. In 2009 Q4 inventories decreased (yes, decreased) by $36.7 billion and this created 2.83% GDP growth. A decrease in inventories also created a 1.10% increase in GDP in Q3 2009.

Government spending was supposedly responsible for 0.86% of GDP growth last quarter. Subtracting that from 1.6% leaves only a 0.74% increase in Q2 GDP. Describing this as anemic would be an understatement. The federal government however accounts for almost a quarter of the U.S. economy and its spending increased by 9.1% in Q2. This would seem to indicate that the federal government contributed a lot more to Q2 GDP growth than what the BEA claims. It also begs the question as to how good the GDP numbers will be when government spending significantly declines as it is scheduled to do in fiscal 2011.

Q2 GDP would also have also been a lot lower without big increases in 'Gross Private Domestic Investment', which was up a whopping 25%. 'Equipment and Software' was up by 24.9% between April and June. In the recently released durable goods report for July, it had a big drop, as did machinery and other components in this category.  Two years of stimulus spending is responsible for revving up the investment component of GDP in the second quarter, but economic reports from early in the third quarter indicate that its impact is already waning. We will have to wait though until just before the November election to see the first numbers for Q3 GDP.

Disclosure: No positions

Daryl Montgomery
Organizer, New York Investing meetup

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

No comments: