Behind the GDP Numbers
David Greenlaw, Morgan Stanley: The advance result for Q2 GDP (-1.0%) was close to expectations, and the report does not alter our assessment of potentially significant upside risk to the +1.0% official forecast for Q3 GDP that we issued in early July. Indeed, motor vehicle assemblies appear to have ramped up very sharply in July, and the early success of the cash-for-clunkers program should help to support production levels through the remainder of the quarter. Meanwhile, the key deflator readings (+0.2% for overall GDP and +2.0% for core PCE) all came in lower than anticipated and the benchmark revision showed a surprisingly large downward adjustment to GDP growth over the past year and a half. In other data, the employment cost index rose just 0.4% in Q2 after the record low 0.3% gain in Q1, lowering the year/year pace to a new low of +1.8% in the history of the data back to 1982. Wages and salaries rose 0.4% for a record low 1.8% annual gain, and benefits growth slowed to just 0.3% also for 1.8% year/year increase.
Beth Ann Bovino, Standard & Poor's: U.S. Q2 GDP growth declined 1.0%, which was much better than the 1.7% decline that markets expected. Q1 GDP was downwardly revised to a -6.4% rate from -5.5%, and Q4 was revised up to a -5.4% pace from -6.3% previously reported. While benchmark revisions changed the trajectory of the data, the sharp slowdown in the rate of decline in the Q2 offers support to market expectations that the recession has troughed. Real consumption declined at a 1.2% clip after a sharply upwardly revised 0.6% increase in Q1 (1.4% before). Nonresidential fixed investment fell a much less severe 8.9% in Q1 after plunging 39.2% in Q1 (previously -37.3%). Residential investment fell 29.3% after dropping 38.2% in Q1. Inventories subtracted $27.2 billion following a $76.5 billion drop the quarter before. Net exports added $47.2 billion to growth while government spending was up 5.6%. The better-than-expected GDP report will add more fuel to market beliefs that the recession is behind us.
Action Economics: The Q2 figures extend the pattern of a skewing in 2009 economic weakness toward the business from the consumer sector, as we discussed in our Apr. 27 commentary on the passing of the recession baton to business. Both fixed and inventory investment continue to contract sharply, just as consumer spending since December has stabilized.
Paul Ashworth, Capital Economics: The more modest 1.0% annualized decline in second-quarter GDP, compared with 6.4% in the first, confirms that the recession is abating. We expect GDP to post a modest increase in the third quarter, as the pace of inventory liquidation slows and government spending enjoys another big fiscal-related surge. Nevertheless, with consumers still flat on their backs, it will be a long time before the recovery gains any real momentum.