The GDP Report: It's Not All Bad News

Most forecasters were surprised by the slowdown in U.S. economic growth revealed in the July 31 advance report on gross domestic product. It showed second-quarter GDP rising a mere 1.1% after a downwardly revised 5% gain in the first quarter. (At S&P MMS, we had projected a second-quarter rise of 2.5%.) The GDP figures for the past three years also were all revised downward substantially to leave a slower growth trajectory through 1999 and 2000, with a more severe recession in 2001 than previously reported.

However, this report's numbers are less troublesome than they appear. The data for the most recent three quarters were actually quite close to prior estimates, relative to what's usually seen with the annual data revisions in July, and they aren't as pessimistic as much immediate news coverage would indicate.

First, changes to GDP figures for the two quarters before the most recent period -- a downward revision for 2002's first quarter to a 5% gain and a similar upward revision in the increase for 2001's fourth quarter to 2.7% -- were almost exactly offsetting. That leaves the current expansion's overall growth trajectory largely intact. Second, the critical consumption and fixed-investment figures for 2002's second quarter were almost exactly as expected, with a 1.9% consumption gain and a 0.3% increase in fixed investment.

NOTABLE NUGGETS. What dragged the headline number lower in the most recent quarter were weaker inventory and trade figures. But those numbers incorporate government estimates for June, which may have been distorted by the effects on corporate inventories of an anticipated strike by dock workers on the West Coast. Government spending growth also fell short of estimates, at 1.8%.

The July 31 report contains one other interesting nugget. Growth figures for the first, second, and third quarters of 2001 were revised lower into negative territory -- a cumulative decline of 2.5%. This presents a much weaker trajectory than previously thought. The upshot: The recent recession stretched out over the first three quarters of 2001, in contrast to the brief third-quarter slump of 1.3% portrayed by previous data.

This is similar to the pattern in the last recession in 1990-91, when the downturn in reported data was revised sharply in the first set of annual revisions to coincide more closely with the recession dates chosen by the National Bureau of Economic Research's Business Cycle Dating Committee.

The upshot: Investors should note that though top-line GDP is lower than expected, the fundamentals of a recovery remain intact. From Standard & Poor's/MMS International staff analysts

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