We added three high-yielding stocks last month to the Retirement Paycheck portfolio, and they alread...
GDP numbers show the recession crawling to an end but followed by a very slow and weak recovery
07/31/2009 11:46 am EST
In short it looks like the recession is coming to an end but that the recovery is going to be so slow and so shallow that many of us might not notice a whole lot of improvement. Certainly not initially.
Let me tease apart some of the numbers in this valuable but confusing report.
First, the top line number. This report, called the advance report, says that the U.S. economy shrank at an annualized rate of about 1% in the quarter. That means that if the economy contract at the second quarter rate for a year, it would be 1% smaller at the end of 12 months. Looked at another way, the economy shrank in size so that it is now 3.9% smaller than it was in the second quarter of 2008.
You need a bit of context before you can say whether those numbers are good or bad. Economists had ben expecting the report to show the economy contracting at a 1.5% annualized rate so in that context the second quarter report is good. It's also good if you compare it to the 6.4% annualized rate of contaction reported in the last revision for the first quarter of 2009. (This second quarter report on GDP was what's called the "advance" report. It's the initial take on GDP and it's followed by revised, and presumably more accurate vesions, called "preliminary" and "final." The final report, actually, isn't final because it's followed up a year later by a final, final number.)
So it is accurate to say that the economy is still shrinking but that the rate at which it's contracting is slowing. Good news.
But before you cheer or boo any GDP number, you always need to dive down a level and see where the growth or lack of it is coming from.
On this level, the report definitely gives us something to worry about.
First, the consumer is still not consuming. Personal consumption expenditures, which account for 60-70% of U.S. economic activity fell at an annualized rate of 1.2%. That wound up subtracting from the GDP growth rate for the second quarter and is a big disappointment after the first quarter when personal consumption expenditures added to GDP growth.
Second, the second biggest contributor to GDP growth in the quarter was government spending--what the report calls government consumption expenditures. It added about 1.12 percentage points to the second quarter GDP growth rate. That was a huge shift from the first quarter when government spending subtracted about half a percentage point from GDP growth. It's a sign that the stimulus package has indeed started to work its way into the economy. But combined with the fall in consumer spending it raises the nasty question Is the stimulus is actually going to jump start the economy? What we need to see is that government spending stimulate a pickup in consumer spending and we haven't seen that so far. Without that kind of pickup, when the stimulus is all spent, the economy will drift back into a slump.
The one item that I'd call unequivocal good news was the increase in net exports. That added 1.38 percentage points to the GDP growth rate.
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