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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.

By Neil Irwin  |  July 30, 2010; 1:12 PM ET
Categories:  U.S. Economy  
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Next: July consumer confidence takes sharp dive

Comments

NOTHING WILL GET BETTER UNTIL OBAMA AND THE DEMOCRATS ARE OUT OF OFFICE. BUSINESS OWNERS WILL NOT HIRE AND PEOPLE WITH MONEY WILL NOT SPEND UNTIL THESE BUSINESS HATERS ARE GONE.

Posted by: charlietuna666 | July 30, 2010 3:03 PM | Report abuse

Chuck, do you scream as you type?

Posted by: mjwies11 | July 30, 2010 3:13 PM | Report abuse

and, as a business owner myself, the reason the software purchases increased was so you could do more with fewer people. There's an old adage that 20% of the people do 80% of the work. With better software, you can find and harness the best 20% and lay off the rest. Ain't productivity improvements wonderful?!

Posted by: Anonymous | July 30, 2010 3:21 PM | Report abuse

The imports are surely the components and/or whole pieces in the technical investment. Small wonder they don't produce jobs. As I recall, exports were up 14% and imports 33%. According to CNBC, the cars Obama bragged about are produced in overwhelming part in Mexico and Canada.

This was supposed to be an export led growth. Instead we are letting China grow. We are letting profits grow. They have made up 100% of their recession level. Jobs are at 14% of pre-recession levels. And this supposedly is the left-wing party. Small wonder rich Arlington loves Obama 2-1. All they care about is their stock portfolios (corporate profits), cheap immigrant wages, and low unit labor costs.

When will we get a New Deal moderate-left party?

Posted by: Anonymous | July 30, 2010 4:27 PM | Report abuse

The imports are surely the components and/or whole pieces in the technical investment. Small wonder they don't produce jobs. As I recall, exports were up 14% and imports 33%. According to CNBC, the cars Obama bragged about are produced in overwhelming part in Mexico and Canada.

This was supposed to be an export led growth. Instead we are letting China grow. We are letting profits grow. They have made up 100% of their recession level. Jobs are at 14% of pre-recession levels. And this supposedly is the left-wing party. Small wonder rich Arlington loves Obama 2-1. All they care about is their stock portfolios (corporate profits), cheap immigrant wages, and low unit labor costs.

When will we get a New Deal moderate-left party?

Posted by: Anonymous | July 30, 2010 4:28 PM | Report abuse

Doom, gloom, dire predictions....am I back in late 2008 when the next great depression was just around the corner? GDP is still growing, yes at a slow rate, but it is growing. Considering the state of the economy just 2 years ago, we should all be jumping for joy that we haven't gone over the cliff. Sometimes I think the business writers just like being the doom and gloomers....what were you saying back in late 2008? Were you right? Tell the truth.

Posted by: LiberalForReal | July 30, 2010 4:35 PM | Report abuse

Stop the deficit to restore confidence. London Telegraph pointed that out today.

Posted by: OldAtlantic | July 30, 2010 4:36 PM | Report abuse

Charlie the tuna:

Didn't you die from mercury poisoning, yet?
We won't protect you as an endangered species. As soon as you're caught and slit from tail to jaw, we'll save tuna from extinction. Give us a SHOUT, which seems to be your method of expression.
And while I'm at it, Chuckles, why don't you mosey on over to the Washington Times where you'll feel more at home. Just sign in at the Hitler Youth Hostel and swear allegiance to Idi Amin, Charles Manson, and the Spanish Inquisition. You'll know it's the WT by the Teutonic script with the swastika in between the Washington and the Times. The Aryan Nation awaits.

Posted by: Pepper99 | July 30, 2010 4:42 PM | Report abuse

Let me see, today's reported rise in GDP was reported at 2.4% (annualized). To put that in perspective, the average increase in GDP in the post war period for Republican presdents was approximately 2.7%, which is pretty close to the 2.4% announced today. The average for Democratic presidents was 4.4%.

So what does this mean? It could mean:

A. Mr Obama is really a Republican president
B. On average, the economy will do better under Republican Administrations based on past performance
C. Since Mr. Obama inherited the worst economic downturn since the great depression we should expect record breaking growth under his administration
D. Maybe, just maybe, recovering from a massage recession takes a lot of hard work and takes awhile to repair the damage.
E. None of the above: fill in your solution here:

Posted by: DrS1 | July 30, 2010 4:51 PM | Report abuse

CHARLIE TUNA! YOUR DOG HAS ITS PAW ON YOUR CAPS KEY!

Posted by: LMcORF | July 30, 2010 4:59 PM | Report abuse

People don't even realize how manipulated this thing is, the GDP was bad, the revisions were the killer. See the leaks here http://www.trade-guild.net/2010/07/maybe-not-everything-is-leaked-in-its.html

Posted by: Anonymous | July 30, 2010 7:48 PM | Report abuse

Historically, the deeper the recession the stronger the snapback. But when you have uncertain healthcare costs, uncertain tax laws, regulation that stifles growth, an anti-business administration, an administration without anyone who has ever been responsible for a payroll, an uncertain energy future, an administration who has attacked numerous sectors of the economy and unsustainable debt makes it tough for companies to hire and expand. The incompetence of this administration across the board doesn't help.

Posted by: Tostitos | July 30, 2010 11:23 PM | Report abuse

The economy is only bad for the brick & motor stores that are reporting losses and layoffs. Internet shopping is increasing and with less cost than using the outdated method the old economy is taking their data from and the advertising cost on printed paper with only local ads will finish a company off. This company has shown profit every quarter since they been online & are now number 54 out of the top 500 internet retailer’s. Visit marketamerica.com/jvglenn and get paid to shop online. Invite your friends & earn 1/2% every time they buy anything for life. To earn cash back & shop online at over 3500 partner stores you will need to enter that you were invited by summergal24@hotmail.com that referred you to shop online.

Posted by: Anonymous | July 31, 2010 9:29 PM | Report abuse

The one positive in the second quarter -- the 22 percent rise in equipment and software spending by businesses, is most likley due to the pending change in the tax code. Currently, Small businesses can normally expense (rather than slowly-deduct, or “depreciate”) equipment purchases up to $250,000. This will be cut all the way down to $25,000 in 2011. Larger businesses can expense half of their purchases of equipment. In January of 2011, all of it will have to be “depreciated.”


Posted by: Anonymous | August 1, 2010 12:01 PM | Report abuse

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