Inside the GDP report: Mixed signals on recovery hopes

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Some viewpoints on the particulars inside the government’s report today on second-quarter gross domestic product, which showed the economy contracted at a smaller-than-expected annual rate of 1% in the quarter:

--- David Rosenberg, economist at Gluskin Sheff & Associates: ‘The details in today’s report left something to be desired. Consumer spending came in at -1.2% annualized, twice the decline expected by the consensus. This occurred in the face of gargantuan fiscal stimulus and leaves us wondering how this critical 70% chunk of the economy is going to perform as the cash-flow boost from Uncle Sam’s generosity recedes in the second half of the year.

‘Imagine, government transfers to the household sector exploded at a 33% annual rate, while tax payments imploded at a 33% annual rate and the best we can do is a -1.2% annualized decline in consumer spending in real terms and flat in nominal terms? What do we do for an encore? In the absence of the fiscal largesse, it is quite conceivable that consumer spending would have shrunk at a 10% annual rate last quarter!’

--- Goldman Sachs & Co. economists: ‘In terms of forward-looking messages, the report has two somewhat contradictory aspects. On the one hand, the rate of [business] inventory liquidation -- at $141bn in 2005 dollars -- is among the deepest on record relative to GDP; efforts to bring production back up to meet the level of final sales will contribute significantly to growth in the second half of the year.

‘At the same time, the personal saving rate was reported at 5.5% for the quarter as a whole, a full point less than we had figured. Although this rate is close to the lower end of the range we think might make consumers comfortable, it overstates the underlying saving rate because of the impact of one-time rebates paid to retirees in May. When this is stripped out of the calculation, our guess is that saving is probably more like 4.5% to 5%, implying a likelihood of continued drag on growth as households try to lift it further.’

--- Michael Darda, economist, MKM Partners: ‘Full-year 2008 growth was revised lower, which means the recession is deeper than previously estimated. To wit: GDP has fallen 3.9% from one year ago, the largest annual decline in post-war history.

‘The silver lining here is that the largest declines in GDP, including those in the 1930s, all produced robust recoveries, even if they didn’t last long enough to produce full-employment. This is why we continue to believe consensus forecasts for 2010 are far too pessimistic (assuming full-year real growth of just 1.8%). Our credit-based indicators, which captured the depth of this recession nearly perfectly, continue to point to 4% real GDP in 2010. A recession of this magnitude would be expected to produce at least a 6%-8% GDP recovery, so our 4% growth outlook could still be considered conservative.’

--- Robert Brusca, head of Fact & Opinion Economics: ‘On balance the news is improving and this report should help to firm up expectation that a recovery is just around the corner. The data in this report are still preliminary and will change over the next few months’ revisions. Often, when the trends are changing, the early readings on GDP fail to grasp the extent of the improvement. If that patterns holds, this GDP report will get stronger as subsequent revisions roll in.’

-- Tom Petruno