Guest Post: Q2 GDP - The Numbers Don't Add Up

Tyler Durden's picture

Submitted by Tony Pallotta of Macro Story

Q2 GDP - The Numbers Don't Add Up

Q1 2011 GDP was revised one final time from 1.9% to 0.4% and Q2 2011 GDP the first estimate was 1.3%. Before analyzing the data I have one very simple question.

Economic growth slowed during Q2 as acknowledged by the Fed and indicated by regional Fed surveys, ISM, durable goods, etc so how could Q2 GDP be higher than Q1 GDP? That would imply the economy accelerated and clearly that has not happened. In other words just as Q1 2008 was eventually shown as the start of the great recession so will Q2 2011 in subsequent revisions.

The table below shows how each of the four components contributed to GDP while the two red highlighted areas indicate the most vulnerable and their negative trend.

GDP = Consumer + Investment + Government + Net Trade


Representing upwards of 70% of the US economy the consumer fell hard from Q1 to Q2 with their contribution to GDP falling from 1.46% to 0.07%. This was driven primarily by contraction in consumer goods from 1.10% in Q1 to (0.33%) in Q2. The chart below shows further consumer weakness based on recent UM Sentiment survey data.

Additionally as more unemployed exhaust jobless benefits and the Federal government is less able to extend aid the consumer faces yet another major headwind.


Two components make up this category (a) Fixed Investment and (b) Inventory.  As the great recession ended retailers began replenishing their stock rooms and adding inventory thus fueling economic growth but as the table above shows that build is coming to an end. As consumers pullback retailers will also pullback and rather than add to inventory will sell existing inventory.

The fixed investment component appears to be either overstated or ready for a serious move lower. The historical comparison with fixed investment and UM Sentiment is presented below while the simple reality is if the consumer is pulling back so will the demand for fixed investment.


The government component seems overstated in the current report at (.23%) after contracting (1.23%) in Q1. July 1 was the start of a new fiscal year for most US states and as required by law they were forced to balance their budget gaps. Reports had put the cumulative budget gaps in excess of $200 billion which in a $14 trillion economy is about 1.4% of GDP alone.

As housing prices continue to fall and foreclosures rise governments will see tax revenues decline and thus the need to cut spending further.

Net Trade

In Q1 trade was a source of contraction at (0.34%) and then in Q2 shown to add to GDP growth by 0.58% yet the trade data through May does not support this.  Simply following the math outlined below the net trade component of Q2 GDP is trending negative and thus a source of contraction not growth as initially reported. Additionally China reported a record trade surplus in May.
March trade deficit was $46.8 billion

April trade deficit was $43.7 billion which is a net positive to Q2 GDP by $3.1 billion through April.

May trade deficit was $50.2 billion which is a net negative to Q2 GDP by $6.5 billion for the month and a cumulative net negative to Q2 GDP by $3.4 billion through May.


"Fool me once shame on you, fool me twice shame on me."

Don't be fooled by the state of the US economy. In reality we never left recession but regardless we are clearly back and the data points to anything but a soft patch. This report and the Q1 revision was truly horrible. In my view it shows the US far more vulnerable to a prolonged period of contraction versus a Japanese style period of rolling recessions.

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??'s picture

so what you are saying is that we are being lied to

DormRoom's picture

QE2 lead to weaker dollar, boosting exports.  Investment up to improve productivity, so companies wouldn't have to hire people. Also more government involvment.  Slightly explains the GDP boost.


The global market is like a circuit, so there's time delay among the various inputs.  Companies earnings grew largely by diversifying into global markets.  But global market largely depend on US consumers.  US consumer continuing to deleverage as indicated in the consumer component of GDP.  Therefore, as global economy contracts, US earnings will further erode, prompting massive layoffs to maintain profitability.


Markets will correct very very soon.  Global Fiscal stimulus was 2 years ago.  Most of the fiscal stimulus has flowed through world economies. 2 years later bull run looks to be ending.  Coincidence or causation?




LawsofPhysics's picture

In other words, this is what you get with a world economy that depends on infinite growth on a very finite planet.  Why is no one talking about fundamentally changing our economic and monetary ways.  It will be done for us anyway.  Hedge accordingly.

rambo1028's picture

Exactly....are your eyes open now? Its all a farce...spread the word....

redpill's picture

The red pill isn't so bitter if you chase it with a glass of quality absinthe.


DeadFred's picture

What they don't seem to get is that the lies are part of the problem not the solution. I'm sure they are fudging the data hoping that people will be lulled into making investments and thereby making their false numbers come true, but the lies have been so systematic for so long that now the numbers are ignored and all that's left is uncertainty. Uncertainty makes for a bad investment climate.

JW n FL's picture

Uploaded by on Jul 29, 2011

Niall Ferguson has some novel solutions for two of America's biggest problems, the failure of public education and record breaking federal debt. His solutions include a scene straight out of "The Good, the Bad and the Ugly!"

JW n FL's picture



Uploaded by on Jul 29, 2011

None of the options being debated by the U.S. Congress can fix the economic situation. Only monetary reform -- a simple solution -- can fix this.


pslater's picture

JW, thanks so much for the link to the Niall Ferguson interview!

JW n FL's picture

You dont like Bill Still channeling JFK and killing off the FED and the Debt?

Are you Pro Dick?

give it a try!! You might like it! you dont know until you try?

Remember November Rally and Book Signing!

"Knowing that Matt Kibbe scares people, I felt obligated to help him promote his master's new Tea Party book. After all, he was so nice to me."

It is about how the Koch Brothers Stole Ron Paul's Party!

Conchy Joe's picture

I believe all these lies are what is eating through the ozone layer and will ultimately cause the worlds oceans to rise several hundred feet.

It's lying at such a historically significant level that (if the country makes it through), we must erect a monument to the event so it is never forgotten.....

JW n FL's picture

Drill! Baby!! Drill!!!

How much do the Koch Brothers Pay You?


How fucking stupid are you?

WonderDawg's picture

Simmer down, JW. Can't you see the sarcasm? Damn, dude, smoke a bone or something.

EFNuttin's picture

Given a record low labor force participation rate, falling wages, and persistent long-term unemployment, when will we just admit that this is the Second Great Depression?  Working off a huge backlog of consumer and commercial debt will take many years.  If some people would give up on Barbarous Keynesian policies and accept a balanced budget amendment, we could really "eat our peas" and get on with recovery.  We should be standing around in the equivalent of an estate sale for the financial institutions that took on too many "no no loans" (no proof of income, no downpayment), dusting ourselves off, and then cleaning up the mess.  Just as there was no shared sacrifice during the Bush Wars of '01 - '09, there is to be no pain in this Depression as even Obama slashes the taxes that matter to most people - Social Security and Medicare.  The rich are getting richer, but that's not new or news.  The real problem is we aren't being allowed to close the door on pre-'08 so we can move on.

Raynja's picture

the second act of the first great depression was the sovereign debt crisis in 1931.  thanks to the bernank we made it an extra few months enabling more leverage to pile on.

mt paul's picture

are we going to print 

negative GDP

with second quarter revisions ....

annualized 1st half 2011 GDP

sub freaking 1 % so far...


fork lift long 


sangell's picture

Bearing in mind the problem of GIGO we must also remember economic data is meant to tell a story. In the first half of 2011 the 'story' was QE was a success but with unemployment ticking up it clearly wasn't. With fiscal stimulus waning if not heading into reverse the 'new story' must be the need for additional 'hair of the dog' or QE3.

css1971's picture

Off topic.

Just tried to donate, didn't work, also had a look at your t-shirts as an alternative, but i'm a FOB & what's left are too small. I guess I could give one away.....

Sudden Debt's picture

At least the Chinese are doing well...

It's like all American politicians work for China these days!

Why don't they release army technology to the American industry, the smaller industry that is and let them work new technology to create jobs?

Like GPS for example! It started out as a militairy tool, the industry made it better, and then gave it away to china so you can now buy one for 50$...


ArkansasAngie's picture

All of this is aimed at controlling our animal spirits from throwing the dad gum bums out.

Artifical money creates artifical recoveries.


Caviar Emptor's picture

Yup. It don't pass the sniff test. 

I agree this is the demarcation of what will be recognized as the next leg down. 

Specifics: Inventory was so aggressively stimulated and built up in 09-10 (without the anticiapted rise in demand) that I think it will take a long time to work through. And an inventory business cycle top is in. Government will provide only a drag for the foreseeable future. Trade: the gap has impoved but only because inventory buildup is completed and imports are tapering. Yes, there has been a mild boost to exports, but the global ecoomy is slowing, this won't be sustainable. Consumers? That's the most contentious issue of all: Wall Street guys want you to beleive that Americans are just as venal as ever, are unconcerned about savings and the economy and will shop till they drop. I say, more and more have dropped and keep dropping daily as funds run out or savings increase or both. Unemployment is clearly on the uptick again (!) and wages are still negative in real terms and will stay negative (I think it gets worse). 

Big picture: What I have called "The Downsizing of America" continues. This is just the next installment. You ain't seen nothing yet. 

WonderDawg's picture

That's about as succinctly as I've seen it said. Couldn't agree more, CE. The next leg down is going to be epic.


midtowng's picture

the question is: when they finally revise Q2 down to negative, will this cause the stock market to fall? Or will it simply anticipate QE3 or QE4?

Sudden Debt's picture

It might even allow them to "go all in" with QE3 and do one that is up to 7 trillion dollars big.

That was the amount actually needed in QE2 if it where to mean anything. QE2 was to small.

AND SUDDENLY: They'll have over 9 trillion in bonds, forfeit on it and America is saved again! Unless "suddenly" nobody wants dollars anymore by then...

Tense INDIAN's picture

i think they dont really care about these numbers...they have planned it long time back what numbers to be reported ...

the producers's picture

Reality may catch up to American politics and the American voter one day.

Until then, manufactured and real crises continue to distract from the ongoing transfer of default risk.



rrrr's picture

You and your parents and grandparents have allowed a system of government to become established in which persons seeking positions of power suffer no negative consequences for knowingly telling untruths, and now you are surprised that it now consists of liars?

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