The closer you look at the GDP report, the uglier it gets
By Neil Irwin
A few more thoughts about this morning's GDP report before I buckle down to write my story for tomorrow's paper. As I've considered the data and talked to some smart economists, here are the conclusions I've reached.
This is not a very good report. The headline number is mediocre -- to a degree that was already expected. But the details appear worse than mediocre.
Consumer spending is rising at only a 1.6 percent pace, suggesting there is no underlying trend toward stronger consumer spending. What's worse, the retail sales data we've seen suggest that consumption was strongest in the beginning of the quarter (April) and has eased downward since then. So, on balance, it's unlikely that consumers are set to drive growth over the remainder of the year.
The steep rise in imports, which was the biggest drain on growth in the second quarter, tougher to explain, coming as it did in a quarter during which fuel prices plummeted. One factor may be the import of smartphones, which were hot sellers this quarter, and the advanced technological equipment that telecom providers were buying to handle the data load from those devices. Yet the spike in imports was offset by the steady boost in exports.
Then you have the factors that drove growth up in the second quarter. Only one of these seems likely to maintain growth.
First, businesses adding to their inventories contributed 1.05 percentage points to growth, more than expected. That is unlikely to be repeated, and may even turn negative in the second half of the year if consumer demand continues slowing.
Second, government spending added 0.9 percentage points to growth. The contribution of the federal government may flatline over the coming months as stimulus spending wears off, while state and local government spending, a slight positive in the second quarter, could turn negative.
More dramatically, residential investment added 0.6 percentage points to GDP growth. But that reflected builders hurrying to finish houses in time for buyers to take advantage of the homebuyers tax credit. That gain from homebuilding activity could be reversed in the second half of the year.
Take all that away, and there was only one clear positive in the second quarter -- the 22 percent rise in equipment and software spending by businesses, which added 1.4 percentage points to the overall GDP.
Put it all together, and you have a lot of indicators that are neutral to negative, and only one clear positive. That leaves me feeling not very good about the outlook for the remainder of 2010 and 2011.
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