No. 313: Second-Quarter GDP and Revisions
JOHN WILLIAMS’ SHADOW GOVERNMENT STATISTICS
COMMENTARY NUMBER 313
Second-Quarter GDP and Revisions
Worst Economic Downturn Since World War II Just Got Worse
Bulk of First-Half GDP Growth Due to Inventories,
Setting Up Likely Third-Quarter Contraction
Lingering Market Hopes for Recovery Should Fade Quickly
PLEASE NOTE: The next regular Commentary is scheduled for Friday, August 6th, following the release of the July employment and unemployment data.
A Business Downturn of Intensifying Severity. GDP revisions back to first-quarter 2007 confirmed that the economic downturn has been more severe than previously reported, while rising inventories and slowing growth — indicated in the "advance" estimate of second-quarter 2010 GDP — have set the stage for renewed quarterly GDP contraction in third-quarter 2010. While such likely will be recognized as a "double-dip" recession in the popular media, this particularly deep and protracted contraction — the worst of the post-World War II era — has been an ongoing economic disaster, with no intervening recovery to delineate between two periods of sharp decline.
The initial plummet in activity was followed by a protracted period of economic bottom-bouncing along a low-level plateau of business activity, with a slight upside bounce in statistics reflecting a combination of short-lived impact from stimulus activity and data distortions due to the extreme nature of the downturn in the context of an economic reporting environment never designed to handle such a circumstance. In December 2009, a downturn in real (inflation-adjusted) broad money supply (SGS Ongoing M3 Estimate) signaled that low-level-of-activity stagnation would turn to intensified or renewed downturn in roughly six-to-nine months (see Commentary No. 308). In the appropriate timeframe, that signal now has started to prove out in the reporting of a number key economic series.
This cartoon from Jim Sinclair’s jsminset.com pretty much catches where we are in the current business cycle. The economy remains in a ski-jump-shaped downturn, as traced out by the path of a novice skier, and, indeed, the economy is tumbling into an unhappy freefall. I thank Mr. Sinclair and his organization for allowing our use of the image.
This pattern of economic growth increasingly should be confirmed in the regular economic reporting of the next several months. Such also should help Federal Reserve Chairman Bernanke to clarify his views on the "unusually uncertain" economic environment. Contracting broad liquidity is a direct cause of reduced business activity. As a separate issue, the chronic structural problems driving this downturn have not been addressed either by the government or the Fed. Accordingly, this re-intensifying economic contraction should not be a shock to any of the policymakers in Washington.
As discussed with last month’s GDP analysis, decades of unsound U.S. fiscal, monetary, financial-regulatory and trade policies — policies known by the various Administrations, Congresses and Fed Chairmen to have been unsound but that catered to political and/or special-interest needs — have culminated in the current crises. The United States led the global financial system into the current systemic solvency crisis and into the current severe economic downturn.
Only politicians and Federal Reserve officials without viable options and Wall Street hypesters would claim that the current structural economic depression could be turned fundamentally by short-lived stimulus measures. Now, as the unaddressed structural issues reassert themselves, the problems at home are at the base of the renewed systemic woes, not European market concerns.
As discussed in the Hyperinflation and Consumer Liquidity Special Reports, U.S. households suffer contracting real income. This is a structural issue that has evolved over decades as an offshoot of domestic trade policies. Where consumers accounted for 72.8% of the just-estimated second-quarter 2010 GDP (including housing), sustained real economic growth — sustained positive real growth in personal consumption — is impossible without positive real growth in consumer income. Temporary economic growth can be generated with the debt expansion — as Mr. Greenspan encouraged when he was Federal Reserve Chairman — but the recent systemic solvency crisis has triggered a severe debt contraction.
The intensifying economic contraction has serious consequences that generally do not seem to have surfaced yet in financial-market concerns — consequences that are unexpected — including unexpected additional explosive growth in the federal deficit, an unexpected further surge in Treasury funding needs, and unexpected renewed solvency concerns for the banking system. Such conditions are bad news for the U.S. equity and credit markets.
The broad outlook is unchanged. The economy still is in a particularly severe and protracted downturn. The consequences of that and the extreme fiscal abuses practiced by the U.S. government over decades promise a shift in global market concerns to the U.S. dollar, with an eventual massive flight from the U.S. currency and a U.S. inflation surge that should lead into hyperinflation. Over the long haul, those with dollar-denominated paper assets would do well to consider preserving their wealth and assets. Irrespective of possibly extreme near-term volatility in the various markets, gold, silver, stronger currencies (such as the Canadian and Australian dollars and Swiss franc) and assets outside the U.S. dollar and even outside the United States should be the best bets for accomplishing that long-term wealth preservation.
GDP-Related Definitions. For purposes of clarity and the use of simplified language in the following text, here are definitions of key terms used related to GDP reporting:
"Gross Domestic Product (GDP)" is the headline number and the most widely followed broad measure of U.S. economic activity. It is published quarterly by the Bureau of Economic Analysis (BEA), with two successive monthly revisions and with an annual revision the following July.
"Gross Domestic Income (GDI)" is the theoretical equivalent to the GDP, but it is not followed by the popular press. Where GDP reflects the consumption side of the economy and GDI reflects the offsetting income side. When the series estimates do not equal each other, which almost always is the case, the difference is added to or subtracted from the GDI as a "statistical discrepancy." Although the BEA touts the GDP as the more accurate measure, the GDI is relatively free of the monthly political targeting the GDP goes through.
"Gross National Product (GNP)" is the broadest measure of the U.S. economy published by the BEA. Once the headline number, now it rarely is followed by the popular media. GDP is the GNP net of trade in factor income (interest and dividend payments). GNP growth usually is weaker than GDP growth for net-debtor nations. Games played with money flows between the United States and the rest of the world tend to mute that impact on the reporting of U.S. GDP growth.
"Real" means growth has been adjusted for inflation.
"Nominal" means growth or level has not been adjusted for inflation. This is the way a business normally records revenues or an individual views day-to-day income and expenses.
" GDP Implicit Price Deflator (IPD)" is the inflation measure used to convert GDP data from nominal to real. The adjusted numbers are based on "Chained 2005 Dollars," at present, where the 2005 is the base year for inflation, and "chained" refers to the methodology which gimmicks the reported numbers so much that the total of the deflated GDP sub-series misses the total of the deflated total GDP series by nearly $40 billion in "residual" as of second-quarter 2010.
"Quarterly growth," unless otherwise stated, is in terms of seasonally-adjusted, annualized quarter-to-quarter growth, i.e., the growth rate of one quarter over the prior quarter, raised to the fourth power, a compounded annual rate of growth. While some might annualize a quarterly growth rate by multiplying it by four, the BEA uses the compounding method, raising the quarterly growth rate to the fourth power. So a one percent quarterly growth rate annualizes to 1.01 x 1.01 x 1.01 x 1.01 = 1.0406 or 4.1%, instead of 4 x 1% = 4%.
"Annual growth" refers to the year-to-year change of the referenced period versus the same period the year before.
The upside revision to first-quarter 2010 growth from 2.74% to 3.73% was due largely to upped estimates in inventory growth, which accounted for 71% of the first-quarter’s total gain. Revised real growth was 1.09% for first-quarter final sales, or GDP net of inventory changes. Inventory gains also accounted for 44% of the 2.39% total growth in the second-quarter, with real final sales growth of 1.34%.
If consumption continues to contract, as has been seen in retail sales of the last couple of months, the recent build-up in inventories would be subject to normal business-cycle fluctuations, with production cut-backs, reduced inventories and a contracting GDP a fair bet for third-quarter 2010.
GDP. Published today by the Bureau of Economic Analysis (BEA), the "advance" or first estimate of second-quarter 2010 Gross Domestic Product (GDP) was estimated at a statistically-insignificant annualized real growth rate of 2.39% (down at an annualized 0.67% net of benchmark revisions) +/- 3% (95% confidence interval), versus a revised 3.73% (previously 2.74%) estimate of real annualized growth in the first-quarter. The year-to-year change in real second-quarter GDP was estimated at 3.17%, up from a downwardly revised 2.39% (previously 2.42%) in the first-quarter.
The GDP implicit price deflator — inflation measure — showed an annualized pace of inflation in second-quarter 2010 of 1.83%, up from a revised 1.05% (was 1.12%) in the first-quarter. In an unusual divergence, annualized inflation for the CPI-U in the second-quarter was a contraction of 0.72% versus a positive 1.53% in the first-quarter. The higher the inflation rate used in deflating the GDP, the weaker is the inflation-adjusted number and vice versa.
The SGS Alternate-GDP estimate for second-quarter 2010 is an approximate annual contraction of 1.3% versus the official estimate of a 3.2% gain, less-negative than the annual 1.5% contraction (2.4% official gain) estimated in the first-quarter. While annualized real quarterly growth is not formally estimated on an alternative basis, a small quarter-to-quarter gain likely would have been realistic for the first-quarter. The relative upturn in annual change reflects the bottom-bouncing at low levels of activity seen for much of the last year in key underlying economic series, not an economic recovery. As discussed in the opening comments, an intensified downturn appears to be unfolding (see the Alternate Data tab).
GNP and GDI (see Sidebar). Estimates of Gross National Product (GNP) and Gross Domestic Income (GDI) for second-quarter 2010 GDP will not be published until next month, at the earliest, due to the lack significance in early national income estimations. The GDP estimate is largely worthless at this point in time, as well, yet it receives heavy media hype.
Historical Revisions Showed Steeper GDP Decline. The following covers primarily the annual revisions to GDP data from first-quarter 2007 to first-quarter 2010. The GDP’s implicit price deflator, nominal data, and the GDI and GDP all were revised for the same period. Those numbers and the impact of some unusual methodological changes will be reviewed over this weekend. Anything of interest will be discussed in the next Commentary.
Annual growth (or contraction) rates for both the real and nominal numbers were lower (more negative) in each year, 2007 to 2009, after the revisions. While there were some shifting patterns of relative strength and weakness, the directions of quarterly changes were not reversed in any instance. In terms of annual change, fourth-quarter 2008 nominal GDP turned negative from flat, as did third-quarter 2008 real GDP.
At the end-point of first-quarter 2010, the aggregate of all revisions left nominal GDP 1.00% lower than previously reported and left real GDP 0.90% lower.
The following graphs show the level and the quarterly and annual growth changes in real GDP from the revisions. These patterns are typical for annual GDP revisions, where near-term GDP usually is overstated due to upside biases in the system, some of which get reversed out over the years. Accordingly, strength still reflected in the most recent quarters should evaporate significantly in next year’s revisions.
The fourth graph shows the year-to-year growth pattern of real quarterly GDP for its entire reporting history. The record annual contraction as of second-quarter 2009 GDP held in place, deepening to a 4.11% contraction from prior reporting of a 3.83% contraction.
Week Ahead. Given the unfolding reality of a weaker economy (or re-intensifying downturn) and more serious inflation problems than generally are expected by the financial markets, risks to reporting will tend towards higher-than-expected inflation and weaker-than-expected economic reporting in the months ahead. Increasingly, that will be seen in economic reporting net of prior-period revisions.
Payroll Employment and Unemployment Rate (July 2010). Due for release on Friday, August 6th, the July labor numbers remain a good bet to be more negative than an already-soft consensus. Briefing.com reports expectations of a 116,000 decline in monthly payrolls. That number includes layoffs of temporary and intermittent census workers in July, which will be roughly 144,000 (per Census reporting), implying a minimal monthly gain for nonfarm payrolls, expected at about 28,000, ex-census workers. In June, payrolls declined by 125,000, gaining 100,000 ex-census. Briefing.com also reports a consensus July U.3 unemployment rate at 9.6%, up from June’s 9.5%.
I expect July nonfarm payrolls to show an outright monthly contraction, ex-census workers, with the unemployment rate jumping more than expected.
The Conference Board’s help-wanted advertising (newspapers) continued bottom-bouncing in June (which leads July reporting), holding at 10 for the eighth straight month. The outlook for the reporting of July labor conditions will be updated next week, as other data from related underlying series become available.