GDP Growth Less Than Meets the Eye

07/31/2009 3:26 pm EST


Jim Jubak

Founder and Editor,

The government's reports on quarterly GDP (gross domestic product) are the most detailed picture investors get of the US economy. The initial report for the second quarter, released Friday, July 31st, shows an economy that's still contracting but at a much slower pace than in the last two quarters. It also shows an economy where growth is heavily dependent on the much-maligned Obama stimulus spending package and where consumers and chief executive officers alike are still sitting on their wallets.

In short, it looks like the recession is coming to an end, but the recovery is going to be so slow and shallow that many of us might not notice a whole lot of improvement—certainly not at first.

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 US economy shrank at an annualized rate of about 1% in the quarter. That means that if the economy contracts at the same rate as it did in 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.

Economists had been 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 contraction reported in the last revision for the first quarter of 2009. (This second-quarter GDP report was what's called the "advance" report. It's the initial take on GDP and it's followed by revised, and presumably more accurate, versions called "preliminary" and "final."

The final report isn't really final, because it's followed up a year later by a final, final number. Still with me?)

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% to 70% of US economic activity, fell at an annualized rate of 1.2%. That wound up subtracting from GDP growth for the second quarter and is a big disappointment after the first quarter, when personal consumption expenditures added to GDP growth.

Also, 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 actually going to jump-start the economy? Here, we’ll need to see government spending stimulate a pick up in consumer spending, and we haven't seen that so far. Without that, when the stimulus money 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 GDP growth rate. But even there the news is mixed, since most of the improvement came from a drop in US imports.

For more of Jim Jubak’s stock picks and market commentary, go to his blog Jubak Picks.

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