Today's GDP data is another piece of data that underwhelmed, and adds to the string of releases casting a long shadow over the US recovery. It's a good snapshot of where the economy is right now as it showed that consumer spending is adding less to growth, while business spending on investment actually picked up. It therefore shows the contrast between companies that may be seeing better revenue and potential profits, but that is not translating to more jobs and confident consumers willing to take on purchases. The report also shows that prices remain very weak, highlighting concerns that its not inflation, but deflation, that may have the Fed worried. The next FOMC meeting is on August 10th, and we'll see if any further steps will be taken to help support the economy.
Breakdown of Today's Report
Expectations had been for a 2.5-2.6% annualized rate, but the economy grew 2.4%. In the 1st quarter there was strong upward revision showing the economy grew 3.7% - the final version for 1st quarter growth had this figure at 2.7%. The growth in the 1st quarter was driven primarily by a rebuilding of inventories.
Consumer spending, the key engine of the US economy as it makes up about two-thirds of GDP, rose by a moderate annualized rate of 1.6%, compared to 1.9% for the 1st quarter. With an unemployment rate at 9.5% it makes sense that this figure is weak right now.
Now, business spending on equipment and software continued its strong pace from the 1st quarter when it jumped 20.4%. In the second quarter, business investment was up 21.9%. Again, this highlights the contrast in the economy between high company profits and a persistently feeble jobs market which is keeping consumers at bay.
The trade gap also weighed on growth as the trade deficit widened to $425.9 billion in the 2nd quarter from $338.4 billion in the first. That subtracted 2.8 percentage points from growth. Imports were up 29%, while exports rose 10%.
Implication for Recovery and Fed
Last week, Fed Chairman Bernanke said that the economy's outlook was unusually uncertain, and has stressed that it would be consumer and business spending that would have to take the reigns as government stimulus efforts fade. Also, central bank officials have already reiterated they plan to keep rates at near zero for an extended period, so unless there are some new programs that come out from the August 10th meeting of the FOMC, it's unclear what the Fed can do at this point.
There is a growing concern that some type of support is necessary, as the threat of deflation is becoming more serious. Price data today showed the core personal consumption expenditure - a rate of underlying inflation which excludes food and energy prices and is closely watched by the Fed - increased by 1.1% from the previous quarter. That was the weakest since the 1st quarter of 2009 and lower than the 1.2% seen in the 1st quarter of 2010. In other words price pressures are heading in the opposite direction that policy makers would like.
In the first quarter, the economy grew by 3.7%, revised up from an originally reported 2.7% increase, but as we mentioned the increase there was led by inventories. But, while 1st quarter growth was revised higher, growth estimates all the way back to the start of 2007 were revised lower. For instance the 4th quarter of 2009 saw growth of 5.0%, not 5.6%.
For all of 2009, the government said the U.S. economy contracted by 2.6%, compared to the previously estimated 2.4% decline. In the whole of 2008, GDP was flat, instead of rising 0.4% as previously estimated. In 2007, the world's largest economy expanded by 1.9%, down from an originally reported 2.1% increase.