GDP: Growth Down, Hopes Up

The latest numbers show a huge drop in exports and a swelling current-account deficit, but they also suggest a stronger third quarter

By Mike Englund

The U.S. gross domestic product (GDP) revision for the second quarter, to 2.8% growth from 3.0%, was almost exactly in line with expectations, as were all the component revisions except for a surprisingly big upward bump in equipment spending, and a more modest inventory revision than expected.

The big story was an enormous $36 billion drop in the year's outlook for net exports. While the drop was fully expected, it was offset by more than half by the upward inventory and consumption adjustments of $10 billion each. The new second-quarter data reveal a smaller growth in final sales of goods and services growth of 2.1%, due largely to the revision in trade. But the new sales numbers include a huge 17% growth for gross investment and a 13% growth for fixed investment. The boost to these critical spending components took the edge off the otherwise troublesome trade figures.

The latest quarterly number revealed a shift from consumption to fixed and inventory investment in domestic spending. The opposite was true in the first quarter, while trade trade took a big chunk out of second quarter growth.


  Interestingly, an obscure but important component of the quarterly GDP report -- foreign income on U.S. production -- essentially the interest or dividend income to foreign investors -- revealed a 72% "real" growth in the second quarter. That's quite a jump. The number went largely unnoticed because it doesn't contribute directly to U.S. GDP. But the number does impact the quarterly current-account data. We now expect the second-quarter U.S. current-account deficit to soar to $166.8 billion, from the $144.9 billion in the first quarter. This current-account deficit will translate to a remarkable 5.7% of U.S. GDP.

The broadest measure of inflation for the economy, the GDP Chain Price Index, accelerated to an unrevised 3.2% growth in the second quarter, from 2.8% in the first quarter, and 1.6% in the fourth, 1.4% in the third, and 1.1% in second quarter of last year. Clearly, the cyclical lows of inflation are behind us.

However, we continue to believe that the bulk of the rise in inflation is behind us, though the rapid -- though seemingly temporary -- surge in oil prices in August raises the chance of an upside surprise in the third-quarter price data.  As it stands, however, domestic inflation measures don't seem to be capturing the oil-price effect, while the import price index will, so we are left with a remarkably tame 2.5% chain price forecast for the third quarter.


  Our third-quarter real GDP forecast will remain at 4%, with some help for the third-quarter outlook coming from the modest upside final-sales surprise for equipment spending, and slight shortfall in the otherwise large upward revision to second-quarter inventory growth.

In the third quarter, we expect a bounce in consumption of 3% to 4%, but a moderation in fixed investment growth, back to 5%, with both components exhibiting some offsetting oscillations. And we expect improvement in the trade figures, given June's huge trade deficit, which hardly appears sustainable.

Englund is chief economist for Action Economics

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