Cleveland Fed On Final Q2 GDP

An Economic Trend piece by John Lindner. The GDP Contribution Chart says all you need to know

Real GDP was revised upward in the final second-quarter revision. Instead of falling at an annualized rate of −1.0 percent as reported in the second estimate, it now is estimated to have fallen only −0.7 percent. Nonresidential investment in equipment was revised up from an 8.4 percent decrease to a 4.9 percent decline, helping to bring the growth rate in overall business fixed investment up 1.3 percentage points (pp) to −9.6 percent. The consumer side looked nearly the same after the revision. Real personal consumption was revised up again, from −1.0 percent to −0.9 percent. Residential investment was revised down from −22.8 percent to −23.2 percent and looks to have somewhat offset the change in personal consumption. There were also upward revisions to exports and government spending. The upward revision to government spending added an additional 0.3 pp to its growth, while exports subtracted 0.9 pp less from net exports.

Revisions to export and import growth offset each other in terms of real GDP growth. Gains in the growth of consumption, business fixed investment, and government spending contributed a substantial portion to real GDP growth in the third estimate, each adding about 0.1 pp to the total.

The Blue Chip consensus forecast for 2009 real GDP growth remained at −2.6 percent in the September survey, though the projection for the second half of 2009 increased again, likely due to some optimism about recent data releases. Most noticeable was the 0.6 pp increase in the third-quarter consensus forecast, which came in at 3.0 percent. The consensus estimate for 2010 growth ticked up again, this month by 0.1 pp to 2.4 percent, its fourth upward revision in five months, though—at 2.4 percent—that remains below its long-run trend. Looking ahead through the rest of the year, even pessimists are predicting positive GDP growth for the rest of this year and into 2010.

Results from two special questions on the Blue Chip survey support the view that employment growth will again lag during this recovery. The consensus forecast was for a peak unemployment rate of 10.1 percent in this cycle. Over 80 percent of respondents predict that the unemployment rate will not fall back below 7 percent until the second half of 2012 (the natural rate of unemployment is estimated to be somewhere around 6 percent). Currently, the unemployment rate is at 9.8 percent, and anecdotes suggest that employers are reluctant to hire people back.

A historical pattern, referred to as Okun’s law, posits that there is an inverse relationship between changes in the unemployment rate and GDP growth, with year-over-year GDP growth moving twice as fast as the change in the unemployment rate. Prior to the BEA benchmarking in July, fears that this relationship was losing strength through this recession had been aired. Assuming a constant natural rate of unemployment, the year-over-year percentage point change in the unemployment rate was plotted against year-over-year GDP growth rates from both pre- and post-benchmarking data. So far this relationship appears to be holding true.


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