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Goldman's Take On Q2 GDP: Ongoing Inventory Accumulation Still A Correction Threat

Submitted by Tyler Durden on 08/27/2010 09:43 -0400

Sorry folks, nothing good to extrapolate based on the just released (and soon to be revised lower one final time) GDP data - from Jan Hatzius: "Implications for Q3 growth are probably slightly negative, though much depends on the monthly data to be released over the next few weeks, starting with Monday's report on consumer spending in July. The reason for this bias is that inventory accumulation, at an annual rate of $63.2bn in the second quarter, is still high enough (+3.7% at an annual rate) to put the economy at risk of at least a mild correction in this component as demand slows to a rate well below this rate. Although final sales to domestic purchasers were revised up to a +4.3% annual rate, this includes an increase in residential investment that is already in process of reversing as well as the effects of the decennial Census. And while much of the trade drag may well be reversed, the starting point for Q3 is a deep hole, so that's more likely to be a Q4 event." The only question is does Joe LaVorgna revert to a 10% H2 GDP now that his flip flopping on Q2 GDP (which he conveniently revised to 1% a few days back) was proven to be too fatalistically dire.

Downward Revision A Bit Smaller than Expected

BOTTOM LINE: Real GDP revised down a bit less than expected, with the main high side surprises in consumption and inventory accumulation, offset to some degree by an even deeper trade deficit than expected. Report suggests increased vulnerability in Q3 if demand slows, as it appears to be doing. Price indexes close to original estimates. Profits post firm (+25.3%) year-to-year gain after taxes, but second-quarter sequential gain is only half as firm.

KEY NUMBERS:
Real GDP growth revised down 0.8 points to +1.6% in Q2 (qoq, annualized, +3.0% yoy) vs. GS +1.2%, median forecast +1.4 %.
GDP price index revised up 0.1 point to +1.9% in Q2 (qoq, annualized, +0.8% yoy) vs. GS +1.8%, median forecast +1.8 %.
PCE core price index unchanged at +1.1% in Q2 (qoq, annualized, +1.5% yoy) vs. GS +1.1%, median forecast +1.1 %.

MAIN POINTS:
1. As widely expected, growth in the second quarter was slower than first estimated by the Commerce Department, but the size of the revision was not quite as large as we or the median forecast anticipated. Relative to our expectations, the main high-side surprises were in consumer spending (mostly services, where the other information available to us is not as good, and nondurables) and in inventory accumulation (where valuation/deflation can drive even the most dedicated economist bats). On the other hand, the trade deficit was revised to show even a larger drag than we had penciled in based on an extremely weak trade report. This drag-which sliced 3.37 percentage points off of real GDP-is largest quarterly trade drag since the initial quarter of this data series in 1947.

2. Implications for Q3 growth are probably slightly negative, though much depends on the monthly data to be released over the next few weeks, starting with Monday's report on consumer spending in July. The reason for this bias is that inventory accumulation, at an annual rate of $63.2bn in the second quarter, is still high enough (+3.7% at an annual rate) to put the economy at risk of at least a mild correction in this component as demand slows to a rate well below this rate. Although final sales to domestic purchasers were revised up to a +4.3% annual rate, this includes an increase in residential investment that is already in process of reversing as well as the effects of the decennial Census. And while much of the trade drag may well be reversed, the starting point for Q3 is a deep hole, so that's more likely to be a Q4 event.

3. Price indexes did not move too much. The GDP index was revised up 0.1 point; the PCE core index was unchanged.

4. As we had expected and the market had already seen in company reports, profits were firm in the second quarter. After-tax profits rose 25.3% from their year-earlier level after adjustment for inventory valuation and capital consumption distortions. However, the pattern is clearly one of slowing as the second-quarter increase was only 2.9%, or 12.1% at an annual rate.

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Fri, 08/27/2010 - 09:44 | 547987 Jason T

OT: I cannot understand Roubini..his accent is what? What is this guy? Italian?

Am listening to bloomberg radio.

Fri, 08/27/2010 - 09:51 | 547998 John McCloy

Once again another danger of propaganda and wishful thinking force fed Fois graux style down retailers throats with the promise of a recovery and the belief that this is a normal business cycle. They have now misled retailers into spending as much as possible without any signs of a consumer on the horizon. The American Eagle CEO said it best yesterday, "The consumer has vanished".They are now planning store closings which = what folks?

More job loss that is right. The government pulled forward alot of spending by retailers by promising them a return of the consumer shortly which is another reason to expect deflation pressure as stores try to unload inventory entering what will be the worst Christmas on record.

Fri, 08/27/2010 - 09:51 | 548001 Turd Ferguson

Mmmmmmandy.......

Fri, 08/27/2010 - 09:55 | 548011 Hall 9000

Why Another Fiscal Stimulus Won't Do Friday, August 27, 2010 - Mohamed A. El-Erian - excerpt

"The great hope a few months ago was for a "recovery summer," with the economy responding favorably to various policy initiatives. Yet the recovery has lost momentum, and while the end of the year will not be as gut-wrenching as the final 3 1/2 months of 2008, when the global economy suffered a cardiac arrest, it will be as consequential in affecting the welfare of millions of people.

In sum, the current policy approaches here and abroad are unlikely to deliver a durable and robust U.S. recovery and, critically, create sufficient growth in jobs. Yet the main debate in Washington is whether to do more of the same -- namely, another fiscal stimulus and another round of quantitative easing by the Federal Reserve.

What is critical to keep in mind is that this situation is part of a broad, multiyear process driven by national and global realignments. It's a secular phenomenon that needs to be better understood and navigated -- by recognizing its structural dimensions and by urgently broadening the excessively cyclical policy mindsets that abound. Unfortunately, the approach in too many industrial countries has been to kick the can down the road, seemingly hoping for a series of immaculate economic recoveries.

http://www.washingtonpost.com/wp-dyn/content/article/2010/08/26/AR201008...

Fri, 08/27/2010 - 10:04 | 548026 Cognitive Dissonance

How is it that all these supposedly extremely bright and economically aware people and institutions were so very wrong about.....well......everything? At what point do the professional and lay people who actually follow them going to say to themselves.......WTF is going on here?

Are the very people who claim they are impartial and information oriented and thus not part of the herd really a part of the herd or are they just tragically stupid? Or something else? While I might prefer to think they are stupid, principally because it's emotionally easier to deal with stupidity than intentional behaviour, the sad conclusion I come to is at a minimum it's herd behaviour and more likely it's herding behaviour.

Sat, 08/28/2010 - 07:10 | 550044 MichaelG