Wednesday, August 27, 2008
Globally, growth is decelerating, and in some cases, is negative. Preliminary estimates of the second quarter (Q2) Gross Domestic Product – GDP, which is the value of a country’s production of goods and services - show the Eurozone contracting 0.2% since the first quarter (Q1), which was dragged down by its biggest countries Germany (-0.5%) and France (-0.3%), the UK is stagnant at 0.0% since Q1, Japan contracted -0.6% since Q1, and even Chinese economic growth slowed to 10.1% (growth over the year, rather than a quarter) from 10.8% in Q1.
But the US grew 0.5% since Q1, or 1.9% on an annualized rate. If the stimulus plan did not work (see posts at Mish's Global Economic Trend Analysis website here and my previous post here), and consumption is growing close to snail speed, what is driving economic growth?
The chart below illustrates the contributions to growth (% change in GDP) for the US listed by type of expenditure (GDP= C+I+G+NX).
There are a few interesting trends here.
- The contribution coming from consumption has been deteriorating throughout 2008 and is well-below 2.2%, its average contribution spanning the years 2000-2007.
- Residential construction (housing market) has subtracted from economic growth dating back to 2006; it, along with a strong draw on inventories, is the primary reason that investment is the largest drag on economic growth in Q2 2008. Nonresidential investment is still a positive contributor to economic growth.
Net exports (exports – imports) is currently the largest contributor to economic growth. Further, its contribution has been robustly positive since Q1 2007; the USD has been depreciating on a broad basis since 2002, which finally flipped net exports in 2007.
Real exports (extracting the effects of rising prices) are currently 13% of GDP and growing around 5 times the speed of the overall economy. And as an added bonus, real imports are falling as well. All in all, net exports are propping up the American economy.
Tomorrow (August 28), the revised estimates of GDP will be released; the consensus is that GDP growth will be revised upward to 2.7% on an annualized rate from 1.9%. Recent reports on inventories and residential construction have been more positive than the Bureau of Economic Analysis (BEA) had expected. However, the trade numbers are the primary reason that the Street sees an upward revision.
For the Advanced release (the first of three), the BEA – the government agency in charge of national accounting – reports its assumptions for June data (the final month in Q2) that have not yet been released. The BEA assumed that net exports of goods would be -$911.1 billion (a deficit) on an annual rate, or -$75.93 billion for the month of June. The report came in at -$70.0 billion, which is a smaller deficit than the government had anticipated. This will add at least $71.1 billion (5.93*12) to the newest estimates of GDP.
How can one say that the economy is currently in a recession when GDP is growing at a 2.7% clip? The real risk going forward is the fourth quarter (October through December) of 2008 when negative growth may be on the horizon.
Will a stronger dollar and slowing global economy reduce net exports enough to let the US economy sink? I believe that the contraction in residential investment will have subsided by then, and thus will cease to be such a large drag on GDP. The real wild card is US consumption; even though inflation is set to abate, there is still a lot in the pipeline that may further depress consumption’s contribution to growth.
Will consumers hold on like they have so far? What do you think?