The Advance 2Q11 GDP Report – Feeling Nauseous
by Dr. Scott Brown, Chief Economist, Raymond James
August 1 – 5, 2011
The advance estimate of second quarter GDP growth came in somewhat lower than expected. It wasn't a huge miss relative to expectations. However, figures for the two previous quarters were revised lower. Some of the second quarter's softness was transitory, but is there a danger of hitting stall speed? Will the debt ceiling crisis contribute to weaker growth?
Click here to enlarge
Real GDP growth rose at a 1.3% annual rate in the advance estimate for 2Q11. It's important to remember that these are preliminary figures. The numbers will be revised in late August and again in late September. However, we don't expect the story to change very much. Annual benchmark revisions delivered downward adjustments to growth to 4Q10 and 1Q11 GDP growth. The revised 1Q11 GDP growth figure (now +0.4%, vs. +1.9% previously) looked like a misprint. No such luck.
Click here to enlarge
So what happened in 2Q11? Consumer spending was soft, but weaker than expected, rising at a 0.1% annual rate (vs. +2.1% in 1Q11 and +3.6% in 4Q11). Japan's disaster had some impact, reducing sales of motor vehicles. More importantly, higher food and energy prices sapped consumer purchasing power. Disposable personal income rose at a 3.9% annual rate in 2Q11, following a 4.7% pace in 1Q11. However, adjusted for inflation, disposable income rose at only a 0.7% pace in both 1Q11 and 2Q11. That's not much firepower for consumer spending.
Business fixed investment rose at a 6.3% annual rate in 2Q11 (structures up 8.1%, equipment and software up 5.7%). Corporate profits have been strong in recent quarters, helping to fuel capital spending. Profits do not necessarily lead to new hiring. In fact, one of the reasons that profits are strong is that firms have held the line on labor costs. Inventories rose slightly faster than in 1Q11, adding modestly to overall GDP growth. The inventory correction was over in early 2010. From here, inventories are likely to grow roughly in line with final sales. A drop in imports (a sign of weakness in the domestic economy) added to GDP growth in 1Q11. Domestic Final Sales (GDP less inventories and net exports), a measure of domestic demand, rose at a 0.5% pace in 2Q11, following a 0.4% pace in 1Q11.
Some of the softness in domestic demand is due to contractionary fiscal policy. Excluding defense, the federal government subtracted modestly from growth in the last few quarters, but that drag will increase as we head into 2012. State and local government subtracted 0.41 percentage point from GDP growth in each of the last two quarters. That doesn't include multiplier effects (that is, laid off workers will reduce spending). This isn't helping the recovery.
Click here to enlarge
The data continue to point to an economy running far below trend. Concerns about a possible downgrade of U.S. debt have already led to some tightening of credit to consumers and businesses - what's sad is that this was completely preventable.
Copyright © Raymond James
