Friday, July 30, 2010

Three Key Points About the GDP Data

This is not meant to be an exhaustive line-by-line analysis of today's GDP report but rather intended to highlight some key pieces of useful information contained in it.

1) Today's report included revisions going back to 2007 and the new data show that the recession was deeper than previously estimated, particularly in 2008.

While overall GDP growth between Q4 2006 and Q1 2010 has now been revised down to +0.2% from +0.4% previously estimated, the contraction in 2008 -on a Q4 to Q4 basis- has now been revised to double from the original number (-2.8% now vs. a -1.9% initially).

Compounding the picture of an even deeper recession than assumed earlier, personal spending fell by twice as much (-1.2%) as the previous estimate for 2009, with a much sharper decline taking place in the first half of last year than the original number had suggested.

2) Although the Q2 2010 GDP number came in slightly on the low side (at 2.4% annual rate) of the market consensus, the sharp upward revision to the Q1 number to 3.7% from 2.7% initially reported translates into a 3.1% growth rate in the first half of the year. While far from impressive, it validates the premise that despite the distinct unevenness and at times disappointing tone of the various data, the economy is on a 3% to 3 1/4% growth path. We would not assign any particular significance with ominous overtones to the slower pace of growth in Q2, as this is the normal course of quarterly fluctuations in such data.

Source: Bloomberg. Haver Analytics

3) In fact, two specific elements in the Q2 data should be viewed as moderately constructive. a) Capital spending surged 17%, following a 7.8% increase in Q1. This shows a robust comeback of capital spending, following devastating declines in the 2007-2009 period, making that sector one of the key engines of growth in the current phase. b) Despite the intense uneasiness over the failure of labor markets to improve at a faster pace so far, personal consumption held up at an acceptable 1.6% rate of growth vs. 1.9% in Q1. While still unimpressive, it does indicate that there is still a core rate of spending (largely reflecting pent up demand from the "dark" for the economy period of 2008-09), that, despite the high unemployment rate, provides a moderate base that continues to support the recovery moving forward.

In a nutshell, there is little in today's data that can be used to fuel fears of a double-dip, a scenario we have been deeply skeptical of in this column. While it is true that the recovery remains on an unimpressive trajectory, it is still moving ahead, with a natural change in the composition of growth, as is to be expected for this phase of the cycle (less contribution to growth from inventories, but with capital spending slowly puking up the baton).

Anthony Karydakis