–Q2 Assumes More Inventories, Wider Trade Gap for Missing Data; Q3 Slow

By Joseph Plocek

WASHINGTON (MNI) – The U.S. Q2 real GDP report shows slow but
steady growth of +2.4%, about as expected, but 2007-09 annual revisions
complicate the picture.

The revisions show lesser growth overall for a sharper contraction
and then a bigger surge in Q4:2009 than before, and incorporate more
complete source data. For 2006-09, real GDP decreased 0.2%, about 0.2
point worse than in the prior estimate (of flat). Less consumption and
more imports were among the revisions, and growth was revised lower for
all three years from 2007 to 2009.

But in Q2, real growth slowed just to a trend-like pace of +2.4% as
real final sales gained slightly to +1.3%. Most remarkably, real final
sales never surged out of the gate as is more usual after a recession.

The Commerce Department assumed more inventory build and a wider
trade gap for missing Q2 data. The deceleration in pace in Q2 reflected
more imports and less inventory building, offset in part by more
investment and better government spending.

Among the components, notable was the 27.9% jump in residential
fixed investment as housing gained. This was the biggest gain since
1983, and the first positive showing since Q3:2009. It seems to break a
string of losses going back to 2006.

Consumption remained light. Real consumer spending was up just 1.6%
in Q2 as nondurables spending decelerated to +1.6%. Restaurant and
clothing sales weakened, in signs of frugality.

Government spending surprised at +9.2% for Federal spending and
+1.3% for state and local spending. The Federal accounts were driven by
+7.4% in defense and +13.0% in nondefense. The other government spending
might have reflected recovery grants, which the Commerce Department
estimated at $102.5 billion during Q2, up from $92.1 billion in Q1.

Other effects of the stimulus law in Q2 included a lowering of
personal taxes by about $120 billion and a hike in social benefits to
individuals of about $61.5 billion, as well as increased federal
spending. The Commerce Department said most of the stimulus effects show
up indirectly in spending and investment.

The overall impression from the data remains that underlying growth
is modest and the top line number is being helped by inventory building
that is lessening and a residential rebound that is dodgy as the real
estate glut is slowly worked off.

Locking ahead, weak consumption held back by a weak jobs market,
rising imports as trade rebounds, and possible removal of stimulus in
the form of government spending retrenchments suggest a modest growth
outlook.

Prices remained subdued but positive: core PCE prices printed just
+1.1%.

GDP Compnts: Q3 Q4 Q1 Q2 Prelim
Real GDP +1.6% +5.0% +3.7% +2.4%
FinalSls/DomProd +0.4% +2.1% +1.1% +1.3%
PCE +2.0% +0.9% +1.9% +1.6%
Res Fix Invest +10.6% -0.8% -12.3% +27.9%
Nonres FixInvest -1.7% -1.4% +7.8% +17.0%
Net Exports cut 1.37 add 1.90 cut 0.31 cut 2.78
Chg Pvt Invty add 1.10 add 2.83 add 2.64 add 1.05

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