Does the story below fit with the predictions of Stephen Roach about the revision of GDP data? It sure doesn't look good for the US's ability to avoid the second dip of the Dubya-shaped recession. This is also not so good for the rest of the world, which has been so dependent on the US as the "consumer of last resort." -- JD
Inventories Keep [U.S.] GDP Growing
By Dean Baker
July 31, 2002
THE REVISED DATA PAINT A MUCH WORSE PRODUCTIVITY PICTURE OVER THE LAST
TWO YEARS.
[U.S.] GDP rose at a 1.1 percent annual rate in the second quarter, as a
sharply slower pace of inventory depletion added 1.2 percentage points
to GDP growth. Final demand, which excludes inventories, actually
declined at a 0.1 percent annual rate, as most sectors showed very
weak growth.
Consumption grew at a 1.9 percent annual rate, with medical care and
furniture accounting for most of the growth. Non-residential
investment dropped a modest 1.6 percent, as a sharp decline in
structure investment offset the first positive showing for the
equipment and software category since the third quarter of 2000. While
the information processing category is now showing modest growth,
there is still considerable weakness in other categories of equipment
spending. Spending on transportation equipment fell at a 21.6 percent
annual rate and is now 28.2 percent below its peak in the third
quarter of 1999.
Residential construction remained strong, growing at a 5.0 percent
annual rate. The net contribution of the government sector continues
to be positive, with strong growth in federal spending offsetting
declines at the state and local level.
A sharp rise in the trade deficit slashed 1.8 percentage points off
the growth rate, as a 23.5 percent rise in imports swamped the effect
of an 11.7 percent increase in exports. The trade deficit hit 4.2
percent of nominal GDP in the second quarter, the highest share ever.
This release also included revisions to the last three years' data.
These revisions were mostly downward and painted a sharply different
picture of the economy during this period. The revised data show the
economy shrinking for the first three quarters of 2001. [so it's official
-- it was a recession following the standard "rule of thumb."] While it shows
stronger growth for the 4th quarter, the growth rate in the first
quarter of 2002 was revised down to 5.0 percent.
This downward revision will knock approximately one percentage point
from the annual rate of productivity growth reported since the onset
of the recession, which will now be placed at the beginning of 2001.
This undermines the view that productivity growth has held up well in
the recession. Productivity growth for the current quarter, which is
reported next week, is likely to be negative.
The measure of net domestic product, which excludes depreciation,
shows an even worse picture. This has risen at just a 0.1 percent
annual rate over the last two years. Since wages and profits must be
paid out of net product, this is arguably a more relevant measure than
GDP.
The revisions also took a sharp bite out of reported profits in the
last three years. The revision was largest for the year 2000, with
domestic profits revised downward by 12.8 percent. The sharpest
decline in percentage terms occurred in the transportation and public
utilities category, a sector that includes WorldCom.
There is some evidence in this report that inflation may be edging
higher. While the GDP price index increased at just a 1.2 percent
annual rate, the index for gross domestic purchases rose at a 2.1
percent rate, the highest since the first quarter of 2001. The
difference is attributable to rising import prices, one consequence of
the falling dollar.
This report must be seen as bad news on several accounts. The economy
is currently quite weak, with final demand essentially flat. More
importantly, the prospects are for slower growth in the immediate
future. Consumers are stretched very far with debt at record levels,
and little wage and employment growth to raise incomes. Equipment
investment may edge higher, but at best this will balance declines in
structure investment, which will not be reversed soon.
Federal spending has increased at a 7.3 percent rate over the last
year, but this will slow in the quarters ahead. With state and local
governments forced to make budget cutbacks as a result of budget
deficits, the government sector will likely be a drag on growth for
the rest of the year. With the housing bubble near the breaking point,
this sector cannot be counted on to sustain growth much longer either.
Finally, the negative news on productivity in the revised data must
dispel many of the remaining illusions about a new economy.
