Bill,
Second quarter GDP growth was 0.7%, slightly above expectations.
Consumer spending rose 2.1%, primarily boosted by spending on home furnishings and
equipment. Purchases of gasoline and other energy products were lower, as high prices
drove cutbacks.
Business spending fell 13.6%. Both construction expenditures and equipment sales were
sharply downward.
Inflation fell one full percentage point, to 2.3%, according to the implicit GDP price
deflator.
Inventory stockpiles were cut, but by a smaller amount than the previous quarter.
The trade balance deteriorated, as exports fell more strongly than imports.
Behind the Numbers
The economy weakened during the second quarter, expanding at a miserly 0.7% annual
rate. Still the pace of growth beat expectations by a modest amount, due to the strength
of government spending and solidity of consumer buying patterns. The major constraints
on the economy were business spending, continued cutbacks in inventory stockpiles,
and further deterioration in the trade balance.
Consumer purchases of furniture and household equipment was the strongest component
of private growth. Residential construction also expanded, further emphasizing the
importance of the strong housing market in preventing recession thus far. Spending
growth for nondurable goods and services was much weaker. Spending on gasoline,
electricity and other energy goods fell, as high prices drove reduced usage.
Business spending was weaker across the board, with no major component advancing.
The slump in IT equipment buying intensified sharply, with 8% declines for both computer
and communications equipment categories. With cash flow still constrained, there is no
sign of turnaround in the current quarter. Completed nonresidential construction projects
dropped, as a slowdown in office and warehouse absorption is leading to construction
delays and cancellations.
Inventory stockpiles were cut again in the second quarter, although not quite as much as
in the previous period. If stockpiles would have remained unchanged, GDP growth would
have been higher by 1.2 percentage points. Apart from IT equipment, most industries
have returned their stockpiles to a desirable level. The sharp pullback in business
demand continues to lower the target level for IT manufacturers.
Exports also continue to flag, as the overseas economy grows increasingly weak. With
recessions developing in many countries, the odds that the U.S. economy will be able to
avoid a downturn are not improving.
The hope is that the monetary easing to date and that which is to come, along with the
tax rebates that will be mailed beginning in late July, will jump-start the economy by
year’s end. This GDP report does little to raise those hopes. |
