Definitely some things to be encouraged about by the latest GDP report, but the overall impression of economic weakness remains.
The Bureau of Economic Analysis reported today that U.S. real GDP grew at a 3.4% annual rate in the second quarter, a substantial improvement over the 0.6% rate now claimed for the first quarter. I was not expecting consumption to continue making the strong contribution it had to 2006:Q4 and 2007:Q1 growth, and that proved to be correct– real personal consumption spending grew at only a 1.3% annual rate in 2007:Q2, compared with its average 3.2% growth over the preceding four quarters.
Housing investment subtracted only 0.5% from the total 2007:Q2 growth rate, an improvement over the -1.0% average contribution over the preceding four quarters. But I fear that the future data for this sector will not be bright.
Despite the weak contribution from consumption and continuing drag from housing, the other components of GDP picked up the slack. Particularly encouraging was the very strong contribution of nonresidential fixed investment, which grew at an 8.1% annual rate in 2007:Q2, enough to contribute +0.8% to total GDP growth all by itself. Declining imports and growing exports contributed an additional 1.2%, another very welcome development. Higher government spending also contributed 0.8% in 2007:Q2 after having subtracted 0.1% in the first quarter. Both observations there are a bit anomalous. It makes more sense to average the two quarters as far as government spending is concerned, and I’m inclined to take the same approach for total GDP. The 0.6% Q1 and 3.4% Q2 give us a 2.0% average GDP growth rate for the first half, a slight improvement over the 1.6% growth of 2006:H2, and a continuation of the overall impression that the economy is growing– sluggishly, but nonetheless still growing.
The new GDP numbers also allow us to update our recession probability index. This is a simple pattern-recognition algorithm that looks at whether the recent behavior of GDP looks more like what typically happens in an expansion or a recession. It is not a forecast of what may come next, but rather an assessment of where the economy has been. To do this with sufficient reliability to describe the state of the economy for 2007:Q2, we will want to wait another quarter for the data to be revised and the further very useful signal about 2007:Q2 that will come from the advance 2007:Q3 estimate when it is released in October. With the just-released 2007:Q2 data, we are in a position to make the call for 2007:Q1. The growth rate for that quarter is now reported to have been 0.6%, and it followed a string of weak growth rates in 2006. As a result, the value of the recession probability index for 2007:Q1 turns out to be 26.2%, its highest value since 2001:Q4.
Note that this inference does make use of the strong 2007:Q2 advance estimates– had 2007:Q2 growth been weaker, the inference for 2007:Q1 would have been even more pessimistic. All of which is a reminder that the latest GDP numbers do not prove that we’re out of the woods yet.