News

The margin of error for the U.S. economy is narrowing

0 565 Market Intelligence

U.S. economic growth in 2010’s second quarter has been revised down to 1.6% by the Bureau of Economic Analysis (BEA). In the BEA’s first estimate for Q2 – also known as the advance estimate – the figure was a higher 2.4%. The +1.6% is less than half of the first quarter’s +3.7%.

U.S. economic growth in 2010’s second quarter has been revised down to 1.6% by the Bureau of Economic Analysis (BEA). In the BEA’s first estimate for Q2 – also known as the advance estimate – the figure was a higher 2.4%. The +1.6% is less than half of the first quarter’s +3.7%.

The U.S. experienced quarter-to-quarter gross domestic product (GDP) declines in five out of six quarters, from the start of 2008 through the first half of 2009. The fastest rate of growth in the recovery phase that began last summer occurred in the final quarter of 2009, at +5.0%.

The latest data makes it clear that the U.S. economic recovery has significantly slowed. In fact, there is a great deal of speculation in the media about the possibility of the U.S. slipping back into recession. Most of the blame for this predicament is placed on weak jobs markets. No doubt there is some validity to this conclusion, but the problem is a little more complex.

In fact, the consumer has actually stepped up and made his or her presence quite well known over the past year. Household spending – which accounts for 70% of U.S. GDP – has increased at a 2.0% annualized rate in three of the past four quarters, including the most recent one. In the most recent two quarters, spending on durable goods (i.e. mainly motor vehicles) has led the non-durables category. Greater stability has returned to corporate ownership in the auto sector.

Weak labor markets have had an impact on residential real estate. The $8,000 tax credit through the end of April helped the housing investment line-item within GDP realize a 27.2% annualized gain off a very low base. Since then, however, residential real estate has gone back on life support. But there is now a floor to how low housing starts can fall. Moving forward, they won’t act as a drag on the economy like they did when they were in freefall in 2006 through 2009.

Two sets of comparisons in the GDP report are most interesting: 1) investment in non-residential construction versus equipment and software; and 2) good exports versus goods imports.

In the latest quarter, non-residential construction grew 0.4% annualized. That compared with a nearly 25% advance for equipment and software. Furthermore, non-residential building investment recorded significant declines in the five preceding quarters. This has meant little in the way of new office and plant facilities and hence few new staffing requirements as yet.

On the other hand, equipment and software investment has been rising at a rapid pace for the last three quarters. With the exception of providing employment at high-tech firms, such investment by firms in other industries is often specifically directed at raising output without adding jobs.

On the income side, corporate profits continued to advance (+4.6%), but at a slower rate than in the previous three quarters. But this left them +39.2% ahead of where they were after Q2 09.

Credit may be tighter, but profit levels and increases to the money supply both point to funds being available to turn around jobs markets, once corporate spending taps are re-opened.

The improvement in goods exports (+12.2% annualized) fell way short of the gain in goods imports (+39.3%). This should not be unexpected, given the way the U.S. economy is structured. As recovery proceeds, there will be increasing imports of consumer goods and an increasing need of foreign oil. Altering this pattern will take a determined effort over the longer term.

Canada is already caught up in the U.S slowdown. Canadian GDP growth in Q1 2010 (+6.1%) was more than twice the U.S. rate, but it will ease back to around +2.5% when reported for Q2.

U.S. real gross domestic product (GDP)
U.S.
Based on quarterly constant (chained 2005) dollars, seasonally adjusted at an annual rate (SAAR figures).
Data source: Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce.
Chart: Reed Construction Data - CanaData.
U.S. private investment: residential vs non-residential structures
U.S.
Based on quarterly constant (chained 2005) dollars, seasonally adjusted at an annual rate (SAAR figures).
Data source: Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce.
Chart: Reed Construction Data - CanaData.
U.S. private investment: non-residential structures vs equipment and software
U.S.
Based on quarterly constant (chained 2005) dollars, seasonally adjusted at an annual rate (SAAR figures).
Data source: Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce.
Chart: Reed Construction Data - CanaData.
U.S. goods exports vs goods imports
U.S.
Based on quarterly constant (chained 2005) dollars, seasonally adjusted at an annual rate (SAAR figures).
Data source: Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce.
Chart: Reed Construction Data - CanaData.

by Alex Carrick

Leave a comment

Or register to be able to comment.