Revised Figures Shed New Light On The Economy's Resiliency

Daily Forex Fundamentals | Written by Wachovia Corporation | Jul 31 08 14:02 GMT |

Real GDP grew at a 1.9 percent annual rate in the second quarter and revised figures for the past three years show growth was slightly weaker than first reported. The second quarter saw a huge $62.2 billion drop in inventories, which shaved 1.9 percentage points off growth. Fourth quarter GDP was revised down and is now slightly negative. Sluggish Growth But No Recession Just Yet Second quarter real GDP expanded at a 1.9 percent annual rate and growth for the past three years was revised down by 0.1 percentage point. The annual revision to the GDP figures produced much less change to the data than had been feared. One notable change is that the economy now shows a modest contraction in the fourth quarter of 2007 and essentially no growth in the first quarter of that year. The revisions show the economy is continuing to operate at a level just slightly better than what we would see in an outright recession. Growth is narrowly focused, however, with most of the improvement coming from net exports. Domestic demand remains extremely weak. Real final sales to domestic purchasers are now up just 0.8 percent over the past year, which is the weakest performance since the 1990/91 recession. Real personal consumption expenditures grew at a less-robust-than-expected 1.5 percent during the second quarter. The impact of the stimulus is still evident in the figures but it appears to have been concentrated in nondurable goods. Spending for nondurable goods rose at a 4.0 percent annual rate, while spending on big-ticket items fell at a 3.0 percent pace. Services outlays also packed much less punch, rising at just a 1.1 percent annual rate. That marks the weakest gain since the first quarter of 1991 and reflects a decline in spending for travel and a sharp slowdown in spending on housing. Consumers are increasingly doubling up, reducing the demand for both for-sale and rental housing. Gains in consumer spending were more than offset by a $62.2 billion plunge in inventories, reflecting declines in both output and imports. The large drop in second quarter inventories should make it easier for third quarter growth to remain in positive territory, particularly with the recent strength we have seen in non-defense capital goods orders and continued strong shipments data from West Coast ports. Another bit of encouraging news is that the drag from the housing slump appears to be diminishing. Residential construction declined at a 15.6 percent pace in the second quarter, following declines of 25 percent in the first quarter and 27 percent and 20.6 percent in the two quarters prior to that. If We Do Not Have A Recession Why Do We Feel So Bad? Most surveys show that the vast majority of consumers believe the economy is currently in recession and consumer confidence has rarely been this low. The GDP figures show that conditions are not quite that dire, with output climbing 1.8 percent over the past year. We have long held that the best measure of the economy most consumers interact with on a daily basis is final sales to domestic purchasers. On this basis the economy has actually been weaker than it was in the last recession. Wachovia Corporation http://www.wachovia.com Disclaimer: The information and opinions herein are for general information use only. Wachovia Corporation and its affiliates, including Wachovia Bank, N.A., do not guarantee their accuracy or completeness, nor does Wachovia Corporation or any of its affiliates, including Wachovia Bank, N.A., assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or any foreign exchange transaction, or as personalized investment advice. Securities and foreign exchange transactions are not FDIC-insured, are not bank-guaranteed, and may lose value.