The freefall is over, but keep your seat belt loosely fastened for further economic turbulence. Seasonally adjusted US GDP declined a less than expected 1% in Q2, although that positive news was offset by a downward revision to the first quarter, which is now estimated to have seen a 6.4% contraction rather than the previous 5.5%. In other words, we have a deeper hole to climb out of in terms of growth foregone. The Commerce Department’s Bureau of Economic Analysis also released revised estimates (undertaken every 5 years) of economic data going all the way back to 1929. From 1997 to 2008, the economy is shown growing at a 2.8% rate, a marginal 0.1% above its earlier figure, but still uninspiring given soaring leverage over the period. The overall impact of the changes is to make the current recession likely to surpass the late-1950s downturn as the worst (in GDP terms) since the Great Depression. The BEA now says inflation-adjusted GDP increased just 0.4% in 2008 from an earlier estimate of 1.1%. From the fourth quarter of 2007 to fourth quarter of 2008, real GDP is shown dropping at a 1.9% annual rate compared with the earlier estimate of 0.8%.
Nonetheless, like a plane pulling out of a terrifying nosedive to almost restore level flight, the deceleration from a 6.4% decline to just 1% over the first half of the year suggests we will see the US recession technically end by year end, as I've long expected given the scale of fiscal and monetary stimulus. Business inventories continued to be a drag on overall GDP, declining by a record $141.1 billion in the second quarteras firms aggressively cut back on new production to reduce stockpiles of unsold goods. Inventories fell by $113.9 billion in the first quarter. The drop in inventories shaved 0.83 percentage points from second-quarter GDP, and a rebound in inventories from very low levels will be critical to driving a cyclical recovery over the balance of the year. Unsurprisingly, after a counter intuitive rebound in consumer spending at the beginning of the year, consumers retrenched again as savings surged, with spending falling 1.2% annualized in Q2.
A key reason why US growth reversed so sharply is contained in the chart above, tracking the actual spending of the Obama stimulus plan. That has risen from sub $10bn in March to $60bn by June, which at the margin makes quite a difference. And there's plenty more where that came from; in fact the heaviest phase of US stimulus spending kicks in next year and 2011 (as infrastructure projects get underway), helping to underpin the modest but real economic recovery I've been predicting since February.
