2Q09 Advance GDP Report

Posted by Ray on July 31, 2009 under Economy, Main | Be the First to Comment

The economy shrank at a “better than expected pace” which is just more lees bad economic data. There are some things with this GDP report which are extremely relevant and forward looking, which is not what the media is stating. Everything in the media is either backwards looking when it is less than rosy or forward looking when data is better than expected. In other words, they are cherry picking good data and down playing bad data.

The data contained in this report is less than positive and I am not sure if it is even less bad as being stated. If you exclude government spending then the report is worse than expected and the additional downward revision of 1Q09 is less than encouraging. I will agree that the headline number is a good number and beat my expectations, however consumption and employment are not showing improvements.

The advance report showed business investment decreased at an 8.9 percent rate in the second quarter after diving 39.2 percent in the previous quarter. Investment in nonresidential structures fell at an 8.9 percent rate compared to a 43.6 percent drop in the first quarter. How much do you want to bet when these numbers are finalized in the next report they are worse than what is currently stated. Additionally, business investment and investment in nonresidential structures is down cumulatively 48.1% and 52.5% in 2009.

Residential investment, which is at the core of the longest recession since the Great Depression, dropped at a 29.3 percent rate in the April-June period after plummeting by 38.2 percent in the first quarter. I thought housing was recovering, I must have misread the all the comments by CNBC and other cheerleaders in the media. This is a cumulative decline of 67.5% in 2009 which is a major issue and shows little sign of stopping there. When the perks for buying a home are gone and as rates creep up this number will get worse, probably in the 4Q GDP report. In the 3Q09 report, the next release, will show an improvement, but you should not think that improvement is part of a recovery, it is just the last of the tax credit buying we will see.

Business inventories continued to be a drag on overall GDP, declining by a record $141.1 billion in the second quarter as firms aggressively cut back on new production to reduce stockpiles of unsold goods. Inventories fell by $113.9 billion in the first quarter. The drop in inventories shaved 0.83 percentage points from second-quarter GDP. The inventory data will be better in 3Q09 as firms will restock, but demand is still weak so even as the number will appear better in 3Q09 it will more than likely get worse by 4Q09 unless the consumer gets back in the game. However, I do not think the consumer will come back until unemployment gets better, i.e. we do not have 500K+ weekly unemployment claims.

Spending was down pretty drastically in 2Q09 at a 1.2 percent rate in the second quarter after rising 0.6 percent in the previous quarter. This is the core of the problem, although it is actually a good thing because this means, hopefully, consumers are either saving their money or reducing debt. I fear that neither of my hopes are correct and the reduced spending is a factor of our high unemployment rate. If you are unemployed you are neither saving nor spending, you are simply getting along, but there is no way to qualify that with a data point.

The freefall in exports braked sharply in the second quarter. Exports fell at a 7.0 percent rate after plunging 29.9 percent in the first quarter. There is no surprise here because other countries are having a real recovery, but even their recoveries might be under pressure and more sluggish than predicted. Japan is still struggling and China is showing some signs of trouble, but that may be short lived.

Next quarter auto sales will also be fantastic as the government programs and ultra low pricing of cars will drive sales. I do not expect this trend to continue into 4Q09 especially if unemployment increases and incentives dry up. The “cash for clunkers” program will add another $2 billion to our national debt, but that is overlooked for short-term gains. Actually, that program is a joke as they let you buy SUV’s still as long as it gets a couple more MPG. They want us to use more fuel efficient cars and reduce greenhouse gases, but you can still get a SUV which could get less than 20 MPG, that makes sense.

Government spending is the major reason for our better than expected GDP report, but that is unsustainable as most of the stimulus is a joke with single pay projects. Government cannot support the economy forever and we certainly do not need another stimulus package as the IMF indicated. The more debt we add the bigger the strain on the dollar will be and the higher the likelihood of higher taxes moving forward.

Yes, we are having a sluggish recovery and even if I am wrong and we have a couple positive quarters of GDP we will likely not see anything dramatic and it will look like slight upward L recovery and will fell more like a depression than a recover. Again, most of the growth will be from the government, so how in the world can we call this a recovery. We need fewer stimuli from the government and more tax cuts for business and, perhaps, subsidize manufacturing to bring jobs back to the US instead of exporting our manufacturing.
The need for manufacturing is clear as we still have a high trade deficit. The trade gap shrank last quarter, preventing a steeper decline. The gap between exports and imports fell to $339.3 billion at an annual pace from $386.5 billion. These deficit is not because other economies cannot keep up with out growing demand, it is because we have little manufacturing and produce very little, except for big equipment, bombs and financial products, and import our hammers and nails from China.
If the government subsidized manufacturing with ultra low taxes and provided other incentives then we could return to a real economy where we produce things cheaper and with higher quality. However, our government continues its fruitless cause of maintaining our current economy which is 70% consumption and little real production. Without getting back to the basics we are simply re-inflating the very problem that got us here in the first place.

We seem to never learn from our previous errors which is scary because I fear that in a few months we will have another few hundred billion dollar stimulus package being voted on. Then the cycle continues of issuing more debt and helping consumers leverage up again. We really need to vote out our representatives as it is apparent that they may have been great lawyers, but they are horrible economists.