Guest Post: 2nd Quarter GDP - Weaker In All The Wrong Places

Tyler Durden's picture

Submitted by Lance Roberts of StreetTalk Live,

The first estimate of the 2nd Quarter GDP was released at a 1.5% annualized growth rate which was just a smidgen better than the 1.4% general consensus.  I said last night on the radio program that this was likely to be the case as the first estimate is based on the consensus estimates as the BLS does not have enough final data to begin making more concrete assessments.  Included in today's release of GDP were the annual benchmark revisions to the data going back to the first quarter of 2009.


The first chart shows these revisions as a percentage of the original GDP estimate.  What we now know is that the economy was much weaker than originally estimated from the 2nd Quarter of 2012 through the 3rd Quarter of 2011.  In fact, the annualized growth rate of GDP in the Q1 of 2011 was only 0.08%.

gdp-2q-spending-072712In our last discussion on GDP we discussed that the fourth quarter of 2011 showed much of the strength was due to the impact of the unseasonably warm winter that boosted construction spending.  Capital expenditures also received a boost as business made investments to receive the tax credit that was due to expire at the end of the year.  Consumers picked up the charge (cards) in the first quarter of 2011 as lower utility bills from the warn winter provided an effective tax credit and loosened up wallets.  Our concern has been the sustainability of the spending by businesses and consumers in the face of stagnant wage growth and slowing end demand.  

In the first estimate of Q2 GDP it was Gross Private Domestic Investment that carried the day by rising modestly from .78 to 1.08.  Improvements were seen in Equipment and Sofware (rising from .39 to .51) and a build in Inventories, rising from -.39 to .32 which is likely unwanted given the recent slowdowns in new orders.  However, every other category declined with Fixed Investment dropping from 1.18 to .76, Non-Residential Investment falling from .74 to .54, Structures fell .35 to 0.03, Residential Investment slipped by almost 50% from .43 to .22 even as the media touts a housing recovery.  

gdp-not-your-fathers-economy-072712We wrote previoulsy that this is no longer "our father's economy" as the shift from a manufacturing to service based economy, combined with globalization, have led to new drivers of the domestic economy.  As we showed previously, despite hopes from the mainstream media, housing and automobile production are no longer the drivers of the domestic economy that they once were.  Residential investment is now comprising only 2.59% of GDP while Automobiles make up 2.9%.  Combined, these two former economic powerhouses still do not make up as much of GDP as Equipment and Software.  The ravenous quest by businesses to increase productivity, and lower costs, in order to maintain profitability in a sub-par growth environment is evident.

gdp-2q-spending-072612Furthermore, globalization has led to a much greater dependence on the exportation of goods and services.  Many have dismissed the slowdown and recession we are witnessing in the rest of the world and believe that the U.S. can remain an island of strength.  While it is possible, given enough artificial support and intervention, the reality is that exports make a huge part of corporate profitability.  Exports have accounted for fully 41% of rebound in the economy post the last recession which is far outside the norm.  The effect of declining wage growth, excess debt and the lack of availability of credit - the U.S. consumer has remained suppressed on many levels while the economy disproportionately gained traction from foreign markets.  

Consumer Weakening

As we continue to dig down into the numbers we previously questioned the sustainability of the consumer.  In the latest report on the economy Personal Consumption Expenditures (PCE) decreased from 1.72 in Q1 to 1.05 in Q2.  Furthermore, PCE has fallen from almost 3% in 2010 to the same level that we last saw in the third quarter of 2011.

Services rose from .61 to .87 in the latest report which support the recent increases in employment which has been primarily temporary and lower wage paying jobs.  However, as witnessed by the continued slate of weak manufacturing reports showing slowdowns in new orders, Goods declined from 1.11 to just 0.18, Durable Goods fell .85 to -.08.  Non-Durable goods, items purchased by consumers with an expected life span of 3 years or less, like clothing, remained fairly stagnant slowing from .26 to .25.  This weakness will most likely increase in the next estimate given the 4.6% decline in the most recent durable goods report, ex-civilian aircraft and defense, which shows the consumer is continuing to struggle.

Real Final Sales

gdp-finalsales-072712Real Final Sales improved marginally in the 2nd quarter by .31% which was slower than the .44% increase in Q1.  However, the index still remains mired at recessionary warning levels. In the past, every time real final sales, on a year-over-year basis, has fallen below a 2% growth rate, currently at 1.87%, the economy has either been in, or was about to be in a recession.  Since the end of the last recession in 2009 - real final sales have been below 2% growth 10 out of the last 12 quarters.  That is unprecedented to any other time in history.   Normally, 12 quarters post a recession, real final sales are growing at an average of 3.89% not 1.87%. 

Due to the continued effect of declining wage growth, see recent NY Times article showing median family incomes now 6% lower than in 2000, excess debt and the lack of availability of credit - the U.S. consumer has remains under pressure.  With the disproportionate dependence on foreign markets for consumption - the impact to the U.S. economy has been one of sub-par growth.

gdp-outputgap-072712This sub-par growth is shown most clearly by the output gap which is the difference between Real GDP and the Potential GDP.  Currently, the output gap is running at $775.3 Billion, or 5.41% of GDP, which is the greatest level in three quarters.  The current level of the output gap relative to GDP remains at levels historically associated with recessions.  This is clearly not an economy on the path to recovery but one that is still statistically growing through artificial interventions and support.  Of course, this also explains why it took more than $2 of debt in the current quarter to create $1 of economic activity - a trend that is clearly unsustainable long term.

GDP Out Of Recession Zone Due To Revisions

gdp-qtrlychg-072712There is one bright spot in the report due to the current revisions.  We have previously reported that the economy had remain mired at a sub-2% annualized growth for 4-quarters in a row without being in a recession.  In past history this has NEVER occurred...until now.  Due to the revisions to the data the domestic economy grew at a 2.45% annualized rate in the first quarter of 2012 and has slowed to a 2.21% growth rate in the second. 

It is apparent that the successive rounds of fiscal stimulus, bailouts, interventions and injections have kept the economy from succumbing to a statistical recession.  Of course, there are those 65% of Americans who currently believe we are in a recession already as they struggle to make ends meet. 

No Recession For Now

There has been a rising chorus of calls as of late that the economy is already in a recession.  For all intents and purposes that may well be the case but the GDP numbers do not currently reveal that.   What we are fairly confident of is that with the weakness that we have seen in the recent swath of economic reports is that the 2nd quarter GDP will likely be weaker than reported in the first estimate.

It is this environment, combined with the continued Euro Zone crisis and weaker stock markets, as the recent rumor induced bump fades, that will give the Federal Reserve the latitude to launch a third round of bond buying later this year.  While the impact of such a program is likely to be muted - it will likely push off an outright recession into next year.

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doc_in_the_house's picture

SHORT SPX @ 1386 !!!

gold looks weaker...from 1630 top and EUR is already tanking (1.24 to 1.231 !!)....SHORT SPX b4 it tanks !!

economics9698's picture

Tax collections are down as a percent of the GDP 14.6% from 2007.  Take away the deficit spending of 8.5% of the GDP and the real number is -7%.  The total debt is 352% of GDP.

Yes we are fucked when Europeans scared shitless quit buying our paper.  But enjoy that +1.5%, lets see 45 months, 3 years and 9 months on a 3 to 5 year bubble/bust time line… tick tock tick tock.

tbone654's picture

I shorted the close...  I almost never do that...

DavidC's picture

"...weaker stock markets"

What weaker stock markets?! We're now about 300 points off the post crisis high! THAT IS NOT WEAK!


jeff montanye's picture

the reference is to world markets.  of twenty or so indices for europe and asia, two are green for the last year

HD's picture

NOT in recession? Okay...

economics9698's picture

Smoke and mirrors.  Take away the 8.5% deficit spendign and the GDP grew -7%.

Haager's picture

"No Recession For Now - There has been a rising chorus of calls as of late that the economy is already in a recession.  For all intents and purposes that may well be the case but the GDP numbers do not currently reveal that.   What we are fairly confident of is that with the weakness that we have seen in the recent swath of economic reports is that the 2nd quarter GDP will likely be weaker than reported in the first estimate."


Full disagree - I did not change the numbers, they did. 

Toxicosis's picture

Exactly.  Book-cooking and manipulation do not equate to reality.  The man on the street is all I'm concerned about, and if he's in major debt, underwater, no savings or close to none for retirement, then that is the real state of affairs.  The GDP is a grand illusion proffered by the government and it's many agencies to lie, cheat, bugger, and steal from the people.

buzzsaw99's picture

No recession for Wall Street, a depression for everyone else.

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

Any idiots that believes establishment stats deserve what they get!




Spacemoose's picture

my standard of living can go up only if gdp goes down and here is why:

1. in the long run (and absent war or theft), the value of the goods and services which country "X" can distribute to its citizens, must be equal to the value of the goods and services which the citizens of country "X" produce (a sentiment which, for unknown reasons, is rarely articulated here except with respect to greece and then only in a roundabout way ["nobody works there"]. is it too obvious to be stated?).

2. in the short run, the value of the goods and services which can be distributed to the citizens of country "X", must be equal to: the value of the goods and services which the citizens of that country produce plus the value of the goods and services the citizens of another country are willing to lend to country "X", less the value of goods and services country "X" transfers to other countries, either as a loan from country "X" or as payment of principal and interest due from country "X" to other countries.

thus, for most of us here in the real world trenches, what really matters is not, per se, bond sales, interest rates or deficits, but rather, the impact those sales, rates and deficits have on productivity and on the allocation of the yields of that productivity.

if you adhere to the above axioms, then even a cursory examination of the numbers would tend to indicate that, if we continue our present path, the US must, at some point in the future, experience (at minimum) an approximate 11% decrease in its standard of living. worse yet, insofar as our GDP includes "goods and services" produced by the government, the actual percentage decline measured against "real" goods and services will be greater, due to the fact that the great majority of "goods and services" produced by the government are the GDP equivalent of empty calories. our situation is certainly not helped by the fact that federal, state and local spending may constitute as much as 40% of GDP. add on top of that, the percentage of GDP which is derived from the FIRE sector is over 20% which (although having some production facilitation and capital formation benefits) is also largely empty calories.

paradoxically, if the above is true, then an increase in the average standard of living of a typical american can go up if GDP goes down. as an example, assume the example of an employee of the dept of energy who is employed for $100,000 per year, writing oil company regulations (which increase the expense of producing energy). in an effort to decrease government regulations, that employee is laid off (this is just hypothetical. we all know that no such thing would ever happen). the ex-gov employee then goes to work for an oil company, for a salary of $50,000 per year. what is the effect on the economy? the standard of living of the ex-gov employee declines by $50,000. the standard of living of the taxpayers who were supporting the ex-gov employee increases by $100,000. the employee increases the productivity of the oil company by an unknown amount Y and the oil company, free from some regulation, increases productivity by X amount, also raising the standard of living of all of us (in the form of cheaper energy for instance). thus, the net increase in the american standard of living has increased by $50,000 plus the value of whatever net increases the additional employee adds to the productivity of the company. the absence of regulations also adds to the productivity of the oil company thus increasing our standard of living. (this would be net of any decrease to our standard of living caused by the absence of the regulations. however, i am assuming, perhaps incorrectly, that the 75,000 pages of rules and regulations in the federal register are a net drag on our average standard of living). thus, GDP down, but standard of living up. (multiply this effect by at least some portion of the over 22 million people who work for federal, state and local governments, and pretty soon we're talking about a real difference in our standard of living).

note that at the beginning of the preceding paragraph, i said "an increase in the average standard of living of a typical american can go up if GDP goes down". i'm not certain that's wholly accurate. it may be that we have gone so far down the road in putting our human assets in non-productive work (like community outreach coordinators for instance), that an increase in the average standard of living of a typical american can go up ONLY IF GDP GOES DOWN.

some might argue that a community outreach coordinator working for $100,000 per year could easily increase the standard of living in a poor community by an amount greater than $100,000 per year. this is undoubtedly true. however, in most situations this is done by decreasing the standard of living of taxpayers by an amount greater than the benefit given to the community. no new goods and services are created in such an endeavor and the net is an overall decrease in the average standard of living in an amount equal to (at least) the salary of the coordinator.

there are only two ways out as i see it. either increase real productivity (i.e. production of goods and services people really want, as opposed to midnight basketball programs for disadvantaged youth) or reduce consumption. look as i may, none of the statements of our rulers imply that they understand this in the least and a neutral observer might go so far as to say that the current administration is actually trying to supress productivity. it's like they are obsessed with treating the symptoms and not the underlying cause. is the problem that difficult to understand?

the problem is not the deficit, the deficit is a symptom. the problem is not debt burden, the debt is a symptom. the problem cannot be solved by printing or by not printing. it cannot be solved by tweaking the rates. as i see it, the problem is that WE ARE CONSUMING MORE THAN WE PRODUCE, AND WE HAVE OBLIGATIONS COMING DUE IN THE FUTURE, WHICH WILL RESULT IN AN EVEN GREATER GAP BETWEEN CONSUMPTION AND PRODUCTION. what part of that do you not understand, ass hat leaders? this is the fundamental economic problem facing the country and it is rarely expressed as such, in the discourse. why is that? is it because stating the problem in this way also defines the solution and the solution is something that cuts against the power and wealth of too many of TPTB? or is it that we believe there exists some alternate dimension solution which would allow us to retain a "business as usual" lifestyle and still pay ever increasing monetary tribute to the government and its private industry enablers? i think not.

so what we see now is the end game, whereby one group fights for a decrease in productivity through enviromental regulations and other groups fight for a decrease in productivity through the transfer of human capital into non-productive uses such as working at the dept of energy, or as a diversity outreach coordinator or as a hedge fund broker and yet another group lobbies for additional laws to reduce productivity by walling out competitors through excessive government regulation (such as monsanto and the food safety bill) and yet another group lobbies for a decrease in productivity by redistibuting wealth from investment (creating new factories) to consumption (food stamps and unemployment benefits).

now, obviously, there is a "sweet spot" with respect to how much government services and wealth redistribution society needs for efficient functioning not to mention the moral component of not allowing our fellow fellow citizens to die of starvation. however, the fact that today we have more government employees than manufacturing employees certainly implies that not only have we traveled past that "sweet spot", we've thelma and louised ourselves right off the edge of an economic cliff. if we are to stop what appears to be an inexorable slide into third world status we are going to need an attitude shift among our leaders. they immediately need to recognize that productivity is a greater virtue than charity.


SheepDog-One's picture

Every analyst out there is so 'QE3 centric' now its just a joke.

Theyre NEVER going to do what everyone expects and has priced-in already.

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

I must say Sheep Dog you have been right on this one all along!



John_Coltrane's picture

Your comment is spot on.  They just don't realize to get QE the market must crash (i.e. >20% loss over a matter of a few days or a week).  So, if they really want QE the market must pull back a lot.  Ramping it higher on rumor fumes just gives realists more opportunity to put on more short positions.  For example, today bought puts on BBY, NFLX, OPEN, and SODA at very favorable prices.  Still want to add to my DV, and HPQ shorts, so I'm hoping for another ramp up on Monday.  Meanwhile, am up over 200% on ZNGA, FB, GRPN, X, ANR, TXN puts.  The only time to consider getting long is after a major crash.

lolmao500's picture

In other news...
Cyber bill has gun control amendment

The amendment was sponsored by Democratic Sens. Frank Lautenberg (N.J.), Barbara Boxer (Calif.), Jack Reed (R.I.), Bob Menendez (N.J.), Kirsten Gillibrand (N.Y.), Schumer and Dianne Feinstein (Calif.). S.A. 2575 would make it illegal to transfer or possess large capacity feeding devices such as gun magazines, belts, feed stripes and drums of more than 10 rounds of ammunition with the exception of .22 caliber rim fire ammunition.

The amendment would only affect sales and transfers after the law took effect.

Next week the Senate is expected to debate and vote on amendments to the Cybersecurity bill.

HD's picture

Predictable. Outlawing weapons and ammo just creates a uncontrollable black market and more violence...

Tuco Benedicto Pacifico Juan Maria Ramirez's picture

"All laws which are repugnant to the Constitution are null and void."

--Marbury v. Madison   1803

GlomarHabu's picture

"We wrote previoulsy that this is no longer "our father's economy"

I can remember a time when just two items, sayings,  encapsulated explaining our economy.

"What's good for GM is good for the country"

and the observed fact that ten cents of every dollar spent was spent on the products of GE and it's subsidiaries.

Now it's not even an Ozark uncle-daddies economy.

Hype Alert's picture

We no longer need to worry about GDP because the only thing we need is central banker speak.

SheepDog-One's picture

Right, who gives a shit about what numbers show? ALL we need now is a couple of central bank heads to release timed statements, thats all.

Squid Vicious's picture

This market feels like a washing machine with a loose belt, shaking more and more and more right before it just shits the bed...

tom's picture

Good solid piece. I just have a different opinion on "the service economy". The economy is still all about stuff: extracting, processing, distributing, servicing and utilizing material goods. What has changed is the skill levels involved.