United States Gross Domestic Product

The Bureau of Economic Analysis released its first estimate of the United States 2010 second quarter Gross Domestic product growth rate today. Their estimated 2.4 percent growth rate was below most economists’ expectations, ours included. They estimate that consumption expenditures grew very mildly at 1.6 percent, investment expenditures grew massively at 29 percent, government expenditures grew very rapidly at 4.4 percent while trade detracted from the overall GDP growth rate by 2.8 percent. In other words, if export growth were balanced with import growth then GDP growth would have been about 5.2 percent. The Bureau also revised previous quarters’ data beginning with the first quarter of 2008, where these revisions imply slower growth in 2008 and 2009, see the table below.

The growth decomposition is very interesting. Total household consuming, which is imports plus consumption grew very rapidly (6 percent) in quarter 2. It is hard to imagine that households can continue to spend this rapidly given their debt levels and the unemployment rate. The strength of investment, which grew 29 percent, was also interesting. All investment components were positive, including real estate. However, by many other indicators, real estate markets are nowhere near normal. Residential real estate investment grew 29 percent, and commercial real estate investment grew 5.2 percent. These numbers are striking, given the underlying weakness in this economy. I believe that they are driven, at least in part, by government stimulus programs. They are reversals from the prior quarter, where residential fell 12.3 percent and commercial fell 18 percent. As well, government spending grew at what I consider to be a fantastic rate, 4.4 percent. The federal spending numbers are strong, as I suspected they would be: defense at 7.4 percent and non-defense at 13 percent. The state and local government spending increased to 1.3 percent which was not what I expected given their lifeless revenues and budget constraints.

As CERF bloggers have stated many times in the past year, the economy still has weak fundamentals. As can be seen from our forecast included in the table below, we forecasted about 1.5 percent growth in the second half of 2010 using the old data. The revised data would not change our forecast significantly.

The government’s home purchase program ended in the second quarter, and as long as it is not reinstated, the strongly positive real estate investment numbers that we experienced in quarter 2 will not materialize in quarters 3 and 4. Regarding the government expenditure strength, perhaps the Federal government can continue to pump up state and local government spending. Sometimes the government expenditure components are revised significantly, so we will watch for that at the end of August.

That leaves trade. Will imports continue to grow with such strength in the remainder of 2010? This leads to a broader question about how households will behave in the next 6 months. We hope they spend less and continue to rebalance their assets and liabilities. But, they might not. If they spend now, near-term GDP will benefit, but long-term GDP will suffer due to poor net household wealth accumulation. If they save, the remainder of 2010 will be weak but long-term GDP growth will benefit.

United States Economic Growth Rates:
CERF forecast vs. Old GDP vs. GDP revisions
2008 Quarter 1 – 2010 quarter 4

2008                          | Qtr 1 |          | Qtr 2 |            | Qtr 3 |              | Qtr 4 |
     Old GDP                  -0.7                1.5                  -2.7                   -5.4
     New GDP                 -0.7                0.6                  -4.0                   -6.8

2009                          | Qtr 1 |          | Qtr 2 |            | Qtr 3 |              | Qtr 4 |
     Old GDP                  -6.4               -0.7                  2.2                     5.6
     New GDP                 -4.9               -0.7                  1.6                     5.0

2010                           | Qtr 1 |          | Qtr 2 |            | Qtr 3 |             | Qtr 4 |
     Old GDP                   2.7                 n/a                  n/a                    n/a
     New GDP                  3.7                 2.4                  n/a                    n/a

     CERF (6/24)             2.7                 3.0                  1.5                    1.5

Units: seasonally-adjusted annualized growth rates
CERF: Center for Economic Research & Forecasting, CLU
Old GDP: published June 25, 2010
New GDP: published July 30, 2010

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