GDP Shrunk at 0.9% Rate in 2nd Quarter on Weaker Consumer Goods, Construction, & Inventories

Our economy shrunk at a 0.9% rate in the 2nd quarter, a second consecutive contraction, as greater personal consumption of services and an increase in exports were more than offset by lower personal consumption of goods, a decrease in fixed investment and weaker investment in inventories, which subtracted more than 2 percent from GDP growth.....the Advance Estimate of 2nd Quarter GDP from the Bureau of Economic Analysis estimated that the real output of goods and services produced in the US contracted at a 0.9% annual rate from the output of the 1st quarter, when our real output contracted at a 1.6% real rate....in current dollars, our second quarter GDP grew at a 7.85% annual rate, increasing from what would work out to be a $24,386.7 billion a year output rate in the 1st quarter of this year to a $24,851.8 billion annual rate in the 2nd quarter, with the headline 0.9% annualized rate of decrease in real output arrived at after an annualized inflation adjustment averaging 8.7%, aka the GDP deflator, was computed from the price changes of the GDP components and applied to their current dollar change....

As is usual with an advance estimate, the BEA cautions that the source data is incomplete and also subject to revisions, which have averaged +/-0.6% in either direction before the third estimate for the quarter is released, which will be two months from now. Note that June construction, June trade in services, and non-durables inventory data have yet to be reported, and that the BEA assumed a $5.7 billion increase in exports of services, a $4.2 billion increase in imports of services, a $10.1 billion decrease in residential construction, a $1.3 billion decrease in non-residential construction, a $1.2 billion increase in public construction, and a $1.2 billion increase in nondurable manufacturing inventories for June before they estimated 2nd quarter output (see the Key source data and assumptions excel file that accompanies this report for more specific details)..

While we cover the details on the 2nd quarter, remember that the GDP news release reports all quarter over quarter percentage changes at an annual rate, which means that they're expressed as a change a bit over 4 times of that what actually occurred over the 3 month period, and that the prefix "real" is used to indicate that each change has been adjusted for inflation using price changes chained from 2012, and then that all percentage changes in this report are calculated from those 2012 dollar figures, which would be better thought of as a quantity indexes than as any reality based dollar amounts. For our purposes, all the data that we'll use in reporting the changes here comes directly from the pdf for the 1st estimate of 2nd quarter GDP, which we find linked to on the BEA's GDP page, which also links to just the tables on Excel and other technical notes. Specifically, we refer to table 1, which shows the real percentage change in each of the GDP components annually since 2018 and quarterly since Q3 of 2018, table 2, which shows the contribution of each of the components to the GDP figures for those quarters and years; table 3, which shows both the current dollar value and inflation adjusted value of each of the GDP components; and table 4, which shows the change in the price indexes for each of the GDP components...

Personal consumption expenditures (PCE), which now accounts for more than 70% of GDP, grew at a 8.16% rate in current dollars in the 2nd quarter, down from the first quarter’s personal spending increase at a revised 9.02% rate, but after inflation adjustments were made with annualized PCE price indices increases of 7.1% for both quarters, real PCE rose 1.0% rate in the 2nd quarter after rising at a 1.8% rate in the first. Consumer spending for durable goods shrunk at a 1.2% rate on lower spending for recreational goods, but since the PCE price index for those durable goods grew at a 1.4% rate, the real output of durable goods represented by that spending decreased at a 2.6% rate. At the same time, current dollar consumer spending for non durable goods grew at a 9.2% rate, but since the weighted price index for those non-durable goods rose at a 15.5% rate, the real contraction in consumption of non durable goods was at a 5.5% rate. Meanwhile, the 9.7% current dollar growth in personal spending for services was deflated by the 5.4% PCE services price index increase to show the 2nd quarter's real growth in services was at a 4.1% rate. Thus, after shrinkage in the goods components of personal consumption expenditures and growth in services, the real growth in services provided to consumers added 1.78 percentage points to the growth rate of 2nd quarter GDP, while the real decrease in the output of consumer durable goods subtracted 0.22 percentage points from the change in GDP, and the real drop in non-durable goods output for consumers subtracted 0.85 percentage points from 2nd quarter GDP growth...

Just as personal consumption expenditures are adjusted for inflation using the PCE price indices to arrive at real PCE, the other current dollar components of GDP are also adjusted for inflation with the price indexes shown in table 4 of the GDP pdf to yield the real change in the output of goods or services. Hence, real gross private domestic investment, which had grown at a 5.0% annual rate in the 1st quarter, shrunk at a 13.5% annual rate in the 2nd quarter, as both fixed investment and inventory growth contracted.. Real nonresidential fixed investment shrank at a 0.1% annual rate as real investment in non-residential structures fell at a 11.7% rate and real investment in equipment fell at a 2.7% rate, while real investment in intellectual property grew at 9.2% rate...hence, investment in real nonresidential fixed investment subtracted a net 0.01 percentage point from the growth in 2nd quarter GDP, as real investment in non-residential structures subtracted 0.32 percentage points, real investment in equipment subtracted 0.16 percentage points from the change in GDP, but investment in intellectual property added 0.47 percentage points to the change in GDP.. But at the same time, real residential investment fell at a 14.0% rate and subtracted 0.71 percentage points from the 2nd quarter's GDP, leaving the total fixed investment impact at minus 0.72 percentage points. For an easy to read table as to what's included in each of those investment categories, see the NIPA Handbook, Chapter 6, page 3..

Meanwhile, slower growth of real inventories reduced the net change in overall gross investment and hence GDP, as real private inventories grew by an inflation adjusted $81.6 billion in the 2nd quarter, after growing at an inflation adjusted $188.5 billion in the first quarter, and as a result the $106.9 billion reduction in real inventory growth subtracted 2.01 percentage points from the 2nd quarter's growth rate, after an inflation adjusted $4.7 billion decrease in inventory growth in the 1st quarter had subtracted 0.35 percentage points from that quarter's GDP growth rate. However, smaller growth of inventories indicate that less of the goods produced during the quarter were left in warehouses or sitting on a store shelf, so their quarter over quarter decrease at a $106.9 billion rate meant that real final sales of GDP were relatively greater by that much, and hence real final sales of GDP grew at a 1.1% rate in the 2nd quarter, after real final sales had decreased at a 1.2% rate in the 1st quarter, when the smaller decrease in inventories meant that real final sales of GDP were only modestly higher than GDP…

After adjustment for much higher export and import prices, both real exports and real imports still increased during the second quarter, but our exports increased by more. Our real exports of goods and services rose at a 18.0% rate in the second quarter, after falling at a 4.8% rate in the 1st quarter, while our real imports rose at a 3.1% rate in the 2nd quarter, after rising at a revised 18.9% rate in the 1st quarter. As you'll recall, increases in exports are added to GDP because they are part of our production that was not consumed or added to investment in our country (& hence not counted in the GDP computation elsewhere), while increases in imports subtract from GDP because they represent either consumption or investment that was added to another GDP component that shouldn't have been, because it was not produced here. Thus the 2nd quarter increase in real exports added 1.92 percentage points to 2nd quarter GDP, after the first quarter decrease had subtracted 0.55 percentage points from first quarter GDP. On the other hand, since imports subtract from GDP, their increase at a 3.1% rate subtracted 0.49 percentage points from 2nd quarter GDP, after a much larger first quarter import increase had subtracted 2.69 percentage points from that quarter's growth. As a result, our improving trade balance added a total of 1.43 percentage points to the 2nd quarter's GDP growth, after our deteriorating first quarter trade deficit had subtracted a rounded 3.23 percentage points from GDP growth in that quarter..

Finally, real consumption and investment by the branches of government shrunk at a 1.9% annual rate in the 2nd quarter, after decreasing at a 2.9% rate in the first quarter, as federal government consumption and investment shrunk at a 3.2% rate while state and local consumption and investment shrunk at a 1.2% rate. Inflation adjusted federal spending for defense grew at 2.5% rate, after shrinking at a 9.9% rate in the first quarter, and that added 0.09 percentage points to 2nd quarter GDP growth, while real non-defense federal consumption and investment shrunk at a 10.5% rate, after shrinking at a 2.5% rate in the first quarter, and that subtracted 0.30 percentage points from GDP. Note that federal government outlays for social insurance are not included in this GDP component; rather, they are included within personal consumption expenditures only when such funds are spent on goods or services, indicating an increase in the output of those goods or services. Meanwhile, state and local government investment and consumption expenditures, which shrunk at a 1.2% annual rate in the 2nd quarter, subtracted 0.13 percentage points from the quarter's growth rate, as a decrease in real state and local investment at a 12.0% rate more than offset increased state and local consumption spending..

 

 

Note: the above was excerpted from my weekly synopsis at MarketWatch 666

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