Some interesting tidbits can be gleaned from the BEA’s recent release. First, despite the acceleration in growth in 2007Q2, the level of output in 2007Q2 is less than what we thought — as of 28 June — it was in 2007Q1. Second, q/q consumption growth now looks weaker than it did before. Third, while net exports provided a big boost to GDP growth, a large chunk of that effect is attributable to import compression, rather than export acceleration. How one views the durability of the net export effect depends in large part upon how one views the sources of import and export trends.
Figure 1 shows the revisions to GDP growth. Figure 2 illustrates the impact of these downward growth revisions on the level of GDP.
Figure 1: Quarter on quarter GDP growth, SAAR, from July 27 (blue) and June 28 (red) releases. NBER-defined recessions shaded gray. Source: BEA, and NBER.
Figure 2: Real GDP in billions of Ch.2000$, SAAR, from July 27 (blue) and June 28 (red) releases. NBER-defined recessions shaded gray. Source: BEA, and NBER.
The level of GDP in 2007Q2 is less than what we thought it was in 2007Q1 as of the June 28th release. This perhaps doesn’t matter much in the sense that one is interested in the momentum of the economy. However, to the extent that one is concerned with how many goods and services are available at a given point in time, it is. (And actually, it matters for momentum to the extent that one thinks log GDP is trend-stationary as opposed to difference stationary).
While my focus is on the international aspects, to the extent that some of the import growth has been driven by above average consumption to GDP levels, it seems important to pay attention to what this is doing. And consumption growth is apparently weakening — indeed the revision indicates that even last quarter’s blockbuster consumption growth figures were less impressive than earlier thought.
Figure 3: Contribution of personal consumption to GDP growth in percentage points, SAAR, from July 27 (blue) and June 28 (red) releases. NBER-defined recessions shaded gray. Source: BEA, and NBER.
The slowdown in Q2 is not unprecedented, and the demise of the American consumer has been so often predicted that I’d be wary of doing it here, but I would say that consumption seems to be signalling a slowdown in overall economic growth. (By the way, an increase in household saving measured in flow terms is usually one of those things that presage an income slowdown.)
I also focus on this issue because it relates to the trade balance’s role in the Q2 growth.
Figure 4: Contribution of net exportsto GDP growth in percentage points, SAAR, from July 27 (blue) and June 28 (red) releases. NBER-defined recessions shaded gray. Source: BEA, and NBER.
Figure 5: Contribution of exports (red) and imports (green) to GDP growth (blue bars) in percentage points, SAAR, from July 27 (red) release. Source: BEA.
Figure 5 highlights the contribution of net exports to real GDP growth. It’s clear a lot of the growth is attributable to this component of aggregate demand. Breaking down the net export effect into imports and exports, it also becomes apparent that — while changes in both components had about equal importance — the big story is the fact that imports have gone from a negative effect to a positive one (see this post for an earlier discussion of this point).
Figure 6 highlights the fact that while exports are growing at a trend 7.15% per annum, the closing of the trade gap is being driven by the reduction of real imports of goods and services. Then the question is whether import compression is due to expenditure switching (in my view, a positive development), or expenditure reduction.
Figure 6: Log real exports (blue) and 04Q1-07Q2 linear trend, imports (red) and non-oil goods imports (green) in billions of Ch.2000$, SAAR, from July 27 release. NBER-defined recessions shaded gray. Source: BEA, NBER and author’s calculations.
If the reduction of imports is due primarily to a collapse in consumption, this is probably not the best outcome. My preference would have been for smooth transition to a greater share of the economy originating the production tradables, and a very gradual slowdown in consumption. That might have been possible with a less expansionary tax policy (think 2003 tax cut — was it really necessary?), more prudential regulation, and perhaps even some hint that a rescission of the 2003 tax cuts was possible. But, as I pointed out last year, by now too many things are “baked in the cake”.
Personally, my guess is for a pretty rapid adjustment in the trade balance, much less marked adjustment in the current account and, like Nouriel Roubini, a really noticeable slowdown in economic growth in 2007H2.