The Recession Bottoms Out

Here is the requisite Q2 GDP post, just keep in mind that , as you will shortly see, these numbers are subject to significant adjustment.

The headline number is that GDP registered a decline of 1% in the April through June quarter. In the first quarter GDP declined 6.4% which represents an upward revision to the previously reported rate of 5.5% (see what I mean). Both personal consumption and inventories declined more than expected but were offset by positive contributions from government spending (fiscal stimulus) and exports.

From Jake at here is a graphic representation:


From the Wall Street Journal’s Real Time Ecomomics Blog, here are selected comments from economists:

  • Hopefully the bottom of the recession is here. The worst recession since the Great Depression is likely coming to an end. Economic growth beginning second half of the year will be made possible by a number of factors. Easy comparisons against last year, inventory buildup, the end of the drag from residential real estate, increased spending coming from the federal government and exports should be the key components. –Sung Won Sohn, Smith School of Business and Economics
  • Downside surprises in consumer spending and inventories more than offset surprises to the upside, primarily in net exports. The latter showed a smaller drop in exports in the second quarter than we expected while the drop in imports was in line with expectations. Inventories were the biggest surprise, subtracting about 1.5% from measured growth. Over the last two quarters, real inventories have declined by more than $250 billion, by far the biggest two quarter drop on record. However, these deep cuts should set the stage for increased production, beginning in the third quarter in our view. –Nomura Global Economics
  • To the extent that anything in these data yield insight into the third quarter, I would argue that the even-faster-than-expected pace of inventory liquidation … points to a larger positive contribution from inventories to GDP growth [in the second half], as inventory shedding slows down. Just to put the scope of this issue into perspective, if inventories were flat in [the third quarter], this component would push real GDP growth higher by more than 5 percentage points! Look for this adjustment, however, to take place over at least 2 or 3 quarters. Still, this should provide a powerful tailwind to GDP in the second half of the year, as firms bring production back up to a pace that is more consistent with demand. Indeed, this is the main reason that we expect [third-quarter] GDP to return to positive territory. –Stephen Stanley, RBS
  • The dramatic fall-off in the pace of U.S. economic decline is clearly a welcomed sign that the intense economic recession may be nearing its end. More importantly, with final sales relatively flat during the quarter, following three consecutive quarters of sharp declines, there is some hope that economic activity may rebound in short order –Millan L. B. Mulraine, TD Securities
  • First impressions: well that wasn’t so bad. Second impression: maybe it is… While the headline decline in output wasn’t particularly troubling, the sources of the decline–namely greater fundamental consumer weakness, continued poor residential and non-residential investment, and very little inflation adjustment–are somewhat concerning. In that sense, the second quarter didn’t mark so much the beginning to the end, but rather a further transition from a technically-driven economic weakness to a fundamentally-driven one. It’s now two years since we first warned that the housing unwind would be devastating for consumer balance sheets, and that assessment is playing out far worse and for far longer than we would have hoped. –Guy LeBas, Janney Montgomery Scott
  • Consumption fell 1.2% in [the second quarter] which was more than most expected and revealed that consumers decided to save the Federal stimulus programs income supports rather than spend them. Nevertheless, government did provide the key support to the economy in Q2 minimizing the contraction. It contributed 1.12% to growth. Such Federal support cannot continue to support future growth. –Brian Fabbri, BNP Paribas
  • The consumer will be in rough shape for a while owing to balance sheet problems, constrained income growth, and tight credit. However, the very successful “cash for clunkers” program will give spending a big lift in July and possible for longer if the program is extended. However, with fundamentals away from government giveaways still very negative, this will provide only a temporary boost, with much of the demand probably borrowing from future sales once the program ends for good. –Joshua Shapiro, MFR Inc.
  • This report provides further support to our view that the recession ended in the second quarter. The decline in real GDP was smaller than consensus expectations but, surprisingly given the monthly data, inventories were liquidated at a more rapid pace than expected, which subtracted 0.8 percentage points from growth. Real final sales, which is GDP less inventory investment, only fell at a 0.2% rate as trade added to growth (domestic final sales fell by 1.5%). The small final sales decline and rapid inventory liquidation sets us up either for a positive revision to second-quarter growth or a faster growth rate of real GDP in the third quarter than previously expected, as a slower rate of inventory liquidation boosts output.–RDQ Economics
  • We do not look for [expected stronger growth rates in the third quarter] to be sustained. As far as inventory restocking, those advancing this argument would do well to look at inventory-to-sales ratios, which remain quite elevated — while inventories have plunged, they have not kept pace with the decline in final sales, and barring a more robust rebound in domestic spending than we anticipate, the incentive to restock will be limited. Of course, this will be an industry-specific adjustment, for instance, auto production will be ramped up, but other manufacturing industries will see less of an increase in production. Moreover, even to the extent we see this restocking effect, it is a transitory phase and not a sustainable driver of growth. As for consumer spending, … while disposable personal income rose during the year’s first half, this was chiefly a function of government stimulus efforts and lower income tax withholding, the effects of which will fade in terms of income growth. With job losses moderating but continuing into 2010, there is little reason to expect meaningful support for consumer spending from the labor market over coming quarters. As long as this remains the case, real GDP growth will remain below trend. –Richard F. Moody, Forward Capital

The consensus is that this represents the bottom of the recession and that barring something truly extreme the third and fourth quarters should show positive growth. That growth is going to be largely driven by inventory restocking and presumably an increase in personal consumption. A lot of the hope for an increase in consumption seems to rely on increased automobile purchases and that expectation seems to be buoyed by the recent success of the “cash for clunkers” program.

Beyond those two events, everyone’s crystal ball seems to be decidedly fuzzy. It’s hard to find much commentary that sees any positives in this report or projections for the next two quarters that will materially improve the labor market. Unemployment and reducing it is the critical issue and we’re going to have to wait awhile before we have any handle on where that number is going.


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