Economic Notes: Mid-Year 2010: Economy Recovering As Expected...Slowly
8/04/2010
By Patrick O'Keefe, Director of Economic Research, J.H. Cohn
The Bureau of Economic Analysis’s (BEA) advance estimate is that real Gross Domestic Product (GDP) – the total output of goods and services adjusted for inflation – expanded at an annual rate of 2.4% in the second quarter (Q-2) of 2010.
Recovery continued, but slowed – as expected.
The growth rate slipped as both consumer spending and inventory replenishment recorded smaller gains which were partially offset by a jump in the trade deficit as imports continued to increase more rapidly than exports.
Concurrent with its initial estimate of Q-2 GDP, the BEA released revised data back to the beginning of 2007. The updates indicate that from mid-2008 through Q-1 2010 the economy contracted a bit more and rebounded slightly less than previously estimated.
Compared to the rebounds from the two previous protracted post-Depression downturns, the current recovery has been anemic. As a consequence, even after four consecutive quarters of growth, the economy has yet to recover from its 4.1% peak-to-trough decline.
In Q-2, output was 1.1% smaller and total employment 5.4% less than at the end of 2007.
The newly cautious consumer largely explains the recovery’s anemia. Despite accounting for 70% of GDP, the consumer has contributed only about one-third of the economy’s recovery. And there is little evidence that this is about to change in the near term.
While real (i.e., inflation-adjusted) consumer spending rose for the fourth consecutive quarter, much of the most recent gain was attributable to shrinking prices, which were down at an annual rate of 1.5% during the quarter. Current-dollar consumer spending has been flat since March, and retail sales were down in both April and May. (See: “Retail Sales Push Pause Button.”)
Although household incomes are rising – if only at a snail’s pace – the job-lite recovery continues to stifle consumer confidence, leading households to cut back on (or even cut up) their credit cards and increase their savings.
The key impetus to the recovery has been business investment in inventories, equipment, and software. While elevated cash flows should sustain spending on machines and software, inventory accumulation can be expected to slow as stocks and sales approach their pre-recession alignment.
It has long been the view here that the recent downturn was not merely cyclic (i.e., reduced output and higher unemployment) but secular (i.e. reduced potential and persistently higher unemployment), a legacy of excessive borrowing and inadequate savings. On that thesis, a slow growth recovery – like the one we are experiencing – is expected to continue into next year.
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The statements, opinions, and conclusions contained herein are based solely upon the author’s own studies, research, and personal experience. Neither J.H. Cohn LLP nor the author makes any representation or warranty as to the accuracy or completeness of this information. J.H. Cohn LLP and the author expressly disclaim any liability for any loss or damage which may be incurred, of any kind whatsoever, as a result of or arising from the use of any of the information contained herein or reliance on the accuracy or completeness of it.
Patrick J. O’Keefe is director of economic research at J.H. Cohn LLP. He can be reached at pokeefe@jhcohn.com or 877-704-3500.