Third Estimate 2Q2010 GDP Signals Danger Ahead

The third estimate of second quarter 2010 GDP was released raising GDP to 1.7% growth compared to the previous release growth of 1.6%.  The analysis follows the headlines from the press release:

Press Release:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.7 percent in the second quarter of 2010, (that is, from the first quarter to the second quarter), according to the “third” estimate released by the Bureau of Economic Analysis.  In the first quarter, real GDP increased 3.7 percent.

The GDP estimate released today is based on more complete source data than were available for the “second” estimate issued last month.  In the second estimate, the increase in real GDP was 1.6 percent.

The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures, nonresidential fixed investment, exports, private inventory investment, federal government spending, and residential fixed investment.  Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP in the second quarter primarily reflected a sharp acceleration in imports and a sharp deceleration in private inventory investment that were partly offset by an upturn in residential fixed investment, accelerations in nonresidential fixed investment and in federal government spending, and an upturn in state and local government spending.

Final sales of computers added 0.03 percentage point to the second-quarter change in real GDP after adding 0.10 percentage point to the first-quarter change.  Motor vehicle output subtracted 0.06 percentage point from the second-quarter change in real GDP after adding 0.74 percentage point to the first-quarter change.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 0.1 percent in the second quarter, the same increase as in the second estimate; this index increased 2.1 percent in the first quarter.  Excluding food and energy prices, the price index for gross domestic purchases increased 0.8 percent in the second quarter, compared with an increase of 1.6 percent in the first.

Real personal consumption expenditures increased 2.2 percent in the second quarter, compared with an increase of 1.9 percent in the first.  Real nonresidential fixed investment increased 17.2 percent, compared with an increase of 7.8 percent.  Nonresidential structures decreased 0.5 percent, compared with a decrease of 17.8 percent.  Equipment and software increased 24.8 percent, compared with an increase of 20.4 percent.  Real residential fixed investment increased 25.7 percent, in contrast to a decrease of 12.3 percent.

Real exports of goods and services increased 9.1 percent in the second quarter, compared with an increase of 11.4 percent in the first.  Real imports of goods and services increased 33.5 percent, compared with an increase of 11.2 percent.

Real federal government consumption expenditures and gross investment increased 9.1 percent in the second quarter, compared with an increase of 1.8 percent in the first.  National defense increased 7.4 percent, compared with an increase of 0.4 percent.  Nondefense increased 12.8 percent, compared with an increase of 5.0 percent.  Real state and local government consumption expenditures and gross investment increased 0.6 percent, in contrast to a decrease of 3.8 percent.

The change in real private inventories added 0.82 percentage point to the second-quarter change in real GDP, after adding 2.64 percentage points to the first-quarter change.  Private businesses increased inventories $68.8 billion in the second quarter, following an increase of $44.1 billion in the first quarter and a decrease of $36.7 billion in the fourth.

Real final sales of domestic product — GDP less change in private inventories — increased 0.9 percent in the second quarter, compared with an increase of 1.1 percent in the first.

Gross domestic purchases

Real gross domestic purchases — purchases by U.S. residents of goods and services wherever produced — increased 5.1 percent in the second quarter, compared with an increase of 3.9 percent in the first.

Gross national product

Real gross national product — the goods and services produced by the labor and property supplied by U.S. residents — increased 1.8 percent in the second quarter, compared with an increase of 4.4 percent in the first.  GNP includes, and GDP excludes, net receipts of income from the rest of the world, which increased $3.7 billion in the second quarter after increasing $22.9 billion in the first; in the second quarter, receipts increased $2.0 billion, and payments deceased $1.7 billion.

Current-dollar GDP

Current-dollar GDP — the market value of the nation’s output of goods and services — increased 3.7 percent, or $132.3 billion, in the second quarter to a level of $14,578.7 billion.  In the first quarter, current-dollar GDP increased 4.8 percent, or $169.1 billion.

Revisions

The “third” estimate of the second-quarter increase in real GDP is 0.1 percentage point, or $3.4 billion, higher than the second estimate issued last month, primarily reflecting upward revisions to private inventory investment and to personal consumption expenditures that were mostly offset by an upward revision to imports.

–                                             Advance Estimate     Second Estimate     Third Estimate
–                                                        (Percent change from preceding quarter)

Real GDP………………………….                         2.4                   1.6                       1.7
Current-dollar GDP…………………                 4.3                  3.6                       3.7
Gross domestic purchases price index..    0.1                  0.1                       0.1

Corporate Profits

Profits from current production (corporate profits with inventory valuation and capital consumption adjustments) increased $47.5 billion in the second quarter, compared with an increase of $148.4 billion in the first quarter.  Current-production cash flow (net cash flow with inventory valuation adjustment) — the internal funds available to corporations for investment — increased $61.1 billion in the second quarter, compared with an increase of $33.3 billion in the first.

Taxes on corporate income increased $2.4 billion in the second quarter, compared with an increase of $84.1 billion in the first.  Profits after tax with inventory valuation and capital consumption adjustments increased $45.2 billion in the second quarter, compared with an increase of $64.1 billion in the first.  Dividends increased $8.1 billion compared with an increase of $11.8 billion; current- production undistributed profits increased $37.1 billion, compared with an increase of $52.4 billion.

Domestic profits of financial corporations decreased $3.4 billion in the second quarter, in contrast to an increase of $5.2 billion in the first.  Domestic profits of nonfinancial corporations increased $48.2 billion in the second quarter, compared with an increase of $117.2 billion in the first.  In the second quarter, real gross value added of nonfinancial corporations increased, and profits per unit of real value added increased.  The increase in unit profits reflected an increase in unit prices and a decrease in unit nonlabor costs that was partly offset by an increase in unit labor costs.

The rest-of-the-world component of profits increased $2.8 billion in the second quarter, compared with an increase of $25.9 billion in the first.  This measure is calculated as (1) receipts by U.S. residents of earnings from their foreign affiliates plus dividends received by U.S. residents from unaffiliated foreign corporations minus (2) payments by U.S. affiliates of earnings to their foreign parents plus dividends paid by U.S. corporations to unaffiliated foreign residents.  The second-quarter increase was accounted for by a smaller decrease in receipts than in payments.

Profits before tax with inventory valuation adjustment is the best available measure of industry profits because estimates of the capital consumption adjustment by industry do not exist.  This measure reflects depreciation-accounting practices used for federal income tax returns.  According to this measure, domestic profits of financial corporations decreased and domestic profits of nonfinancial corporations increased.  The increase in nonfinancial corporations reflected increases in manufacturing, in wholesale trade, in transportation and warehousing, and in “other” nonfinancial that were partly offset by decreases in utilities, in information, and in retail trade.  Within manufacturing, the largest increase was in petroleum and coal products.

Profits before tax increased $15.3 billion in the second quarter, compared with an increase of $224.5 billion in the first.  The before-tax measure of profits does not reflect, as does profits from current production, the capital consumption and inventory valuation adjustments.  These adjustments convert depreciation of fixed assets and inventory withdrawals reported on a tax-return, historical-cost basis to the current-cost measures used in the national income and product accounts.  The capital consumption adjustment decreased $0.8 billion in the second quarter (from -$169.9 billion to -$170.7 billion), compared with a decrease of $106.9 billion in the first.  The inventory valuation adjustment increased $32.9 billion (from -$36.4 billion to -$3.5 billion), compared with an increase of $30.8 billion.

Analysis:

The concern of Econintersect is the trend lines QoQ.  GDP grew at 1.72% and the breakdown of the growth is:

Personal Consumption Expenditures = 1.54%

Private Domestic Investment =             2.88%

Export Adjustment =                              (3.50%)

Government =                                           0.80%

–                                                                  =====

Total growth =                                           1.72%

Here is what we know:

1) Net exports will be worse in 3Q.

2) Slowing stimulus spending will reduce GDP by 0.2% to 0.3% in 3Q2010, and 0.4% to 0.6% in 4Q2010 according to the CBO.

3) Personal consumption expenditure is growing.  The question is whether it will be large enough to overcome the stimulus contraction.  On the other side of the argument, consumer spending favors foreign products increasing the export adjustment.

4) State spending is likely to contract in 3Q2010.

5) Data released to date for 3Q2010 show a sharp decline in residential real estate investment

The bottom line is that the USA will be lucky if it maintains second quarter growth in 3Q2010.

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.7 percent in the second quarter of 2010, (that is, from the first quarter to the second quarter), according to the “third” estimate released by the Bureau of Economic Analysis.  In the first quarter, real GDP increased 3.7 percent.
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