Wednesday, September 29, 2004

The final revisions to second quarter GDP make the big slow-down look a lot less slow.
The U.S. economy grew at an annual rate of 3.3 percent in the spring, the government reported Wednesday. That was significantly better than a previous estimate but still the weakest showing in more than a year.

The Commerce Department said the April-to-June increase in the gross domestic product � the country's total output of goods and services � was revised upward by 0.5 percentage point from its estimate just a month ago that the economy expanded at a 2.8 percent pace in the second quarter.
Why the big jump? According to the Commerce Department,
The upward revision to the percent change in real GDP primarily reflected a downward revision to imports and upward revisions to private inventory investment and to exports.
Let's start with trade. The preliminary revision of 2004:II GDP released late last month showed a trade balance of -$588.7bn. It's now revised upwards to -$580.3bn. It's a small revision and still chalks up the largest quarterly deficit of all time, but granted an improvement nonetheless.

If one adds $8bn to the 2004:II current account, the revision could bring the CA balance as a percentage of GDP down from -5.7% to -5.4%. Still a gigantic figure, and a US record.

The really big contributor to the upward revision in GDP is not trade, however, but gross private domestic investment. In the preliminary revision, investment was measured as growing 17%, but the final revision now says 19%. Equipment and software investment growth was revised significantly, from 12.1% to 14.2%, and that contributes the majority of the overall investment figure.

Note, however, that consumer spending was not revised at all, and still stands at 1.6% growth for the second quarter, the lowest figure since the 2001 recession when consumer spending in 2001:II rose a mere 1.0%.

At first blush, 3.3% growth sounds pretty good all things considered. But what does the larger picture tell us? Incredibly anemic growth in consumer spending combined with vigorous growth in capital investment. This is the fifth quarter in a row now where GDP growth has outpaced consumer spending growth. In 2004:II non-residential capital investment actually contributed more to GDP growth than consumer spending did, even though the former is one-seventh the size of the latter. This is a pretty unusual occurrence. Since 1970 (over 138 quarters) it has happened just 14 times, 11 of those being either in a recession or in a quarter preceding a recession. Today's "recovery" is becoming almost solely investment driven, by capital which can find no consumer to match it.

Yet again, more evidence that overproduction and deflation will continue to be the name of the game.


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