2011 Q2 GDP - The Numbers Don't Add Up

Guest Post:Q2 GDP - The Numbers Don't Add Up
Submitted by Tyler Durden on 07/30/2011 12:43 -0400

Submitted by Tony Pallotta of Macro Story

Q2 GDP - The Numbers Don't Add Up

Q1 2011 GDP was revised one final time from 1.9% to 0.4% and Q2 2011 GDP the first estimate was 1.3%. Before analyzing the data I have one very simple question.

Economic growth slowed during Q2 as acknowledged by the Fed and indicated by regional Fed surveys, ISM, durable goods, etc so how could Q2 GDP be higher than Q1 GDP? That would imply the economy accelerated and clearly that has not happened. In other words just as Q1 2008 was eventually shown as the start of the great recession so will Q2 2011 in subsequent revisions.

The table below shows how each of the four components contributed to GDP while the two red highlighted areas indicate the most vulnerable and their negative trend.

Consumer

Representing upwards of 70% of the US economy the consumer fell hard from Q1 to Q2 with their contribution to GDP falling from 1.46% to 0.07%. This was driven primarily by contraction in consumer goods from 1.10% in Q1 to (0.33%) in Q2. The chart below shows further consumer weakness based on recent UM Sentiment survey data.

Additionally as more unemployed exhaust jobless benefits and the Federal government is less able to extend aid the consumer faces yet another major headwind.

Investment

Two components make up this category (a) Fixed Investment and (b) Inventory. As the great recession ended retailers began replenishing their stock rooms and adding inventory thus fueling economic growth but as the table above shows that build is coming to an end. As consumers pullback retailers will also pullback and rather than add to inventory will sell existing inventory.

The fixed investment component appears to be either overstated or ready for a serious move lower. The historical comparison with fixed investment and UM Sentiment is presented below while the simple reality is if the consumer is pulling back so will the demand for fixed investment.

"Fool me once shame on you, fool me twice shame on me."

Don't be fooled by the state of the US economy. In reality we never left recession but regardless we are clearly back and the data points to anything but a soft patch. This report and the Q1 revision was truly horrible. In my view it shows the US far more vulnerable to a prolonged period of contraction versus a Japanese style period of rolling recessions.