The recent release by the Bureau of Economic Analysis, of the 2nd estimate of the 2nd Quarter of 2013’s GDP – gross domestic product, was really somewhat mixed below the headline story despite a sharp increase in economic growth from the original estimate of 1.7% to 2.5%. Econoday always provides good coverage of major economic points which is primarily focused on the headline numbers as they are reported. Their analysis of the latest GDP report provides a good basis for a debate of this good news/bad news story.
“Final sales of domestic product showed a revised gain of 1.9 percent versus the advance estimate of 1.3 percent. This series increased 0.2 percent in the first quarter. Final sales to domestic producers (which exclude net exports) was nudged down to 1.9 percent versus the initial estimate of 2.0 percent. This followed a 0.5 percent gain in the first quarter.”
While the revised gain in final sales was a positive for the current report it is the longer term trend of real final sales of domestic product has declined sharply as of late and is mired at levels that is normally consistent with recessionary economic periods.
“The upward revision to GDP growth was mainly due to a sharp upward revision to net exports. Also, there were improvements to inventories and nonresidential structures investment. Government purchases were modestly weaker. Other components were little changed.”
The outsized increase in exports is somewhat of an anomaly that is consistent with recent survey reports. It is likely that the level of exports will be adjusted in upcoming reports. The real concern was the weak demand for imports which suggests further internal weakness of domestic consumption. Finally, residential construction came in extremely weak which casts further concerns over the durability and sustainability of housing as an economy underpinning. The chart below shows the changes from the 1st to the 2nd estimate of GDP which shows the entire gain coming primarily from the increase in exports.
“Turning to comparisons to the first quarter, the increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures, exports, private inventory investment, nonresidential fixed investment, and residential fixed investment that were partly offset by a negative contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.”
The problem is that the trend of growth in the underlying components of the GDP report are deteriorating, most importantly of which is personal consumption expenditures. Personal consumption currently makes up in excess of 68% of the economic calculation so it is more than concerning to see the deterioration in the annualized growth rates. While private investment picked up in the 2nd quarter it is primarily a function of businesses investing in productivity increases to keep employment, and wages, at a minimum as end demand remains weak. While there were positive contributions in the latest report from the underlying components; the negative trends in the data is more predictive of future outcomes.
“Overall, GDP growth for the second quarter was better than earlier believed. Compared to past recoveries, the latest growth rates are not inspiring but the upward revision may add to Fed debate to gradually start to taper asset purchases.”
While GDP growth did come in stronger than previously estimated it is, once again, most important to review the overall trend of growth rather than focusing on a single data point. As I showed in our previous report on GDP, which immediately followed the massive revisions by the BEA to the historical data, the economy has already appeared to have peaked for the current economic cycle. The 6-panel chart below shows the long term annualized growth trends of personal incomes, consumer spending, industrial production, employment and the personal savings rate as compared to GDP.
The assumption is that the stronger economic growth in the second quarter will clear the way for the Federal Reserve to begin reducing their ongoing bond buying/liquidity injection scheme in the months ahead. This could likely prove to be a mistake as there is scant evidence of an economy that is currently improving. With an economy that is currently built on roughly 70% personal consumption (68.3% after latest revisions to the economic data to be exact) it is hard to see where economic growth is going to come from when incomes remain under attack by slow economic growth and high unemployment. Savings rates are being depleted as debt levels increase to maintain the current living standard as cost pressures are passed down from producers. The lack of demand for imports, as stated above, is likely bearing testimony in this regard.
The reality is that the economic data trends are clearly weak and, unfortunately, seems to be getting weaker. It is not uncommon, as inventories become depleted or incremental demand is built-up, that pops in activity will occur. However, those “pops” have tended to be short lived in recent years with the economy rolling from one “soft patch” to the next. While the Federal Reserve continues to state that negative drags to economic growth are fading, and that the economy is showing signs of accelerating, the actual data suggests otherwise. The recent spike in interest rates, which is a drag on economic growth and activity, combined with a reduction in the liquidity support from the Federal Reserve, could turn out to more restrictive on the economy, and the markets, than is currently believed.
Courtesy: Lance Roberts
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