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July 29, 2005
2nd quarter GDP: steady as she goes
The numbers are in. Real GDP was up 3.4% in the 2nd quarter. This is on the heels of 3.8% growth in the first quarter.
That's not stellar, but it's not bad either. It is well within the sustainable range and shouldn't fuel inflation fears all that much. But King at SCSU Scholars finds the news that others might miss.
The markets are soft today after the GDP report came in with 3.4% growth. But buried in the report itself is good news.
The real change in private inventories subtracted 2.32 percentage points from the second-quarter change in real GDP after adding 0.29 percentage point to the first-quarter change. Private businesses reduced inventories $6.4 billion in the second quarter, following increases of $58.2 billion in the first quarter and $50.1 billion in the fourth.
Real final sales of domestic product -- GDP less change in private inventories -- increased 5.8 percent in the second quarter, compared with an increase of 3.5 percent in the first.
As my dad would say, "in English, please?" It means that in real terms, businesses who had stockpiled lots of inventory over the previous six months sold it all off in the previous quarter. It seems unlikely that they would continue to disgorge inventories (already at the 1.3 benchmark as a ratio to sales), so production should pick up again in the next quarter. A 5.8% growth of final sales is the best since the second quarter of 2003.
This report also showed a turnaround in net exports, with imports decreasing 2% in the quarter. This and the Chinese repeg of the yuan might mark the end of that drain on GDP growth going forward.
Yep. The market may have yawned, but it really was pretty good news when you dig beyond the headline. PGL of Angry Bear saw it too... and he seems a little less bearish today.
As one that has been hoping for a reversal of the bad news that we saw for export and investment demand, however, I see some good news in these numbers. Export demand growth was reported at 12.6% per year and imports fell. Fixed investment growth was reported at 9.3% with both business fixed investment and residential investment reporting strong growth rates.
Final sales of domestic product grew at a 5.8% annualized rate with the difference between growth in sales and the growth in production coming from a “negative contribution from private inventory investment”. Could this news be a harbinger of an export and investment led recovery, which would might increase the employment to population ratio to 63% by year end? One can only hope!
It is, of course, too early to say if this is a "soft landing." That's a call that I think we might be able to make about a year from now with some air of certainty. But today's news is consistent with a soft landing scenario. Next week we'll get some more labor market numbers and we'll see if we're making any more progress on that e/p ratio.
Finally, I'll throw in this from CNN:
Manufacturing in the Midwest region continued to expand in July, according to the release of the Chicago PMI, shortly after the start of trading. The index rose to 63.5 from 53.6 in June, topping forecasts for a rise to 55.5.
UPDATE: Tim Duy and James Hamilton weigh in as well. Note also that this is the 9th straight quarter of greater than 3% real GDP growth. I was in 7th grade the last time that happened.
Posted by William Polley at July 29, 2005 4:56 PM
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Comments
Compare what King realized v. what Tim Duy and I independently realized. All three of us picked up on the final sales growth figure (as the inventory drawdown). Tim & I also noted that fixed investment demand growth was really strong. OK, Tim did not note the rise in export demand but I did. To which Brad Setser added a comment under my Angrybear post that he was not hopeful that we'd continue to see net export improvement.
But I'm giving Tim even more credit as he's taking on the pessimism of James Hamilton. Fancy that, this liberal Angrybear was optimistic while conservative Hamilton was less so.
All in all, mixed signals with lots to discuss.
Posted by: pgl at July 29, 2005 6:33 PM
well guys...you can jump up and down all you want...I know a lot of people who have been unemployed for an extended period of time and my read by talking to people in positions to hire is that they are not planning on hiring domestically.
The job situation is not going to get better in the near term..
rt
Posted by: rmt at July 29, 2005 8:19 PM