First Look at GDP for the Second Quarter

The government released its first look at GDP for the second quarter of 2012 along with revisions to estimates from previous years.  Economic growth in the Spring was 1.5%, close to expectations and confirming the sluggishness economy.  Business investment in equipment led the growth, rising 7.2% followed by exports, which rose by 5.3%.  A minor plus was an increase in consumer spending on services, which rose 1.9% (not strong, but more than any quarter since it rose by a similar amount in 2011Q2.  Both consumer purchases of goods and business investment in structures weakend considerably, and were the lowest growth rates in a year.  Government purchases also continued to be a drag on the economy.  Removing inventories, final sales grew by 1.2%, the slowest rate since early 2011.  Inflation as measured by the PCE index declined to 0.7%, the lowest rate since Spring 2010.  Over the past year, inflation has been 1.6% while core inflation has been 1.8%.

As is customary, the government revised prior data based on new information.  The recession was slightly less severe, "only" a decline of 4.7% (still the largest decline since the Great Depression), and the initial stage of the recovery was weaker than initially reported (2.4% growth in 2010 instead of 3%).  Much of the downward revision for 2010 was due to more moderate increase in equipment investment than previously thought.  The economy came very close to shrinking in the first quarter of 2011, with growth not reported at a 0.1% annualized rate, but rebounded in the second quarter, growing 2.5%, nearly double the prior report.

The two strongest quarters of economic growth since the end of the recession were the fourth quarters of 2009 and 2011.  In both cases, much, if not all, of the growth was due to a sruge in inventories and thus were not sustainable.  In 2009Q4, the economy grew by 4%, but if you subtract the impact of inventories, it actually declined by just over 0.5% while in 2011Q4, the economy grew by 4.1%, but only by 1.6% once inventories are excluded.

What did we learn from today's report?  Revisions to previous data still show a severe downturn in 2008-2009 followed by even a more modest recovery than previously reported in 2010.  Data for the second quarter of 2012 still show an economy that is growing, but quite slowly.  Corporate profits declined in early 2012 for the first time since 2011Q1.  After boosting profits for years, overseas profits declined by the most since the recession, reflecting the global slowdown including the recessions in Europe.  What happens to the economy in the rest of 2012 depends on whether consumers and businesses are strong enough to offset problems from overseas (and from Washington, DC!).  As of now, it looks like a continuation of slow growth.

Inflation and jobs

This morning's inflation report confirmed that inflation is firming, at least for now.  Though people don't like to hear this, when you exclude food and energy, inflation is lower than the headline figure, but core inflation is still 2%, the highest in recent years.  Unlike last year, there are no signs of potential deflation for the foreseeable future.  This should reduce the likelihood of Fed easing at it's next meeting next week.  By the way, why look at core inflation instead of overall inflation?  Gas prices have dropped since the data for the report was collected, which should lead to lower inflation next month.  Fruit and vegetable prices spiked in the 3 months ended in February, declined over the next 3 months and rose significantly again between May and August.  That led to higher inflation early in the year, less inflation in the Spring and more in the summer (even including seasonal adjustments).  Over time, headline inflation is the figure to watch, but it tends to be distorted in the short term by the volatility in the prices of certain products.
Meanwhile, new claims for unemployment rose, signaling continued weakness in the jobs market.  Given the weakness in the job market and higher inflation, real weekly earnings declined by 0.8% in August and is now down by 2.2% since it's recent peak in October 2010.  Clearly, weakness in the job market along with weak earnings will continue to put pressure on consumer spending, contributing to continued economic weakness into 2012.