from Follow the Money

Where Is this U.S. Recession Already?

August 29, 2008

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

Note: This piece is by Christian Menegatti of RGE Monitor, where this piece first appeared.

So, good news on the real U.S. GDP growth front: 3.3% in Q2 2008. But is it really good news? Let’s dig a bit deeper, maybe past the headlines…

Personal consumption was revised slightly upward from 1.5% of the advanced release (adv) to 1.7%. Not a major change. Notwithstanding the stimulus package consumption failed to stay above 2% (in 2007 it averaged about 2.3%) and continues to grow at the slowest pace since 1991.


Gross private domestic investment was revised upward (from -14.8% to -12%), but remained a drag on GDP contracting at a pace consistent with the one seen in the two previous recessions (1991 and 2001) (the biggest negative contribution to GDP growth in Q2 -1.82%). The improvement is explained by the change in inventories that were less of a drag than previously estimated (their contribution to growth was revised from -1.92% up to 1.44%). Residential investment were basically unchanged with respect to the advance release, (-15.7% versus -15.6%), this is an improvement with respect of an average of about -24% in the previous three quarters.


So, what explains the upward revision? Largely the external sector.

Is this really good news?

Net export contributed to 3.1% of the 3.3% growth. The real growth rate of export was revised upward from 9.2% to 13.2% (and the contribution to real GDP growth from 1.16% to 1.65%). The real growth rate of imports was revised downward from -6.6% to -7.6% (and their contribution was therefore revised up from 1.26% to 1.45%).

These numbers expose the weakness of U.S. domestic demand which is clear from both the performances of personal consumption and imports (both on the consumer side and on the industry side), although the weakness in import enters as a positive contribution to GDP – note that the positive contribution to GDP that came from the slump in imports was larger than the one of personal consumption (1.45% versus 1.24%). Moreover, exports win the medal from the strongest contributor to growth this quarter, with a contribution of 1.65%.

But will this continue?

A few weeks back we surveyed a group of countries navigating towards (or through) recession. The list included the U.S., Canada, Spain, Ireland, Italy, the UK, the Baltics and New Zealand.

Now the growth engine of the EMU, Germany, is faltering, together with France. And a recession might be in the works for Japan as well. This essentially leaves us with a fully fledged G7 recession in the making.

Canada, Europe and Mexico are the biggest export destinations for the U.S. Now with this reassessment of the global outlook, Canada, Europe (as well as Mexico) navigating towards a downturn and the USD in strengthening mode against the EUR and the CAD the support of exports might go missing in the next few quarters. Moreover, personal consumption will not benefit from the stimulus package anymore and its growth might very well turn negative.

Another important data point today came from the income side of the economy. Adjusting nominal gross domestic income for inflation shows a growth of 1.9% for Q2 2008. Note that these figures already experienced two consecutive quarters of contraction in Q4 2007 and Q1 2008. These figures suggest that the growth rate of the U.S. economy might be much weaker than what signaled in the GDP figures. Gross domestic income is a figure closely watched by the Fed.

One more element of the report worth mentioning is the fall in corporate profits. For the fourth consecutive time corporate pre-tax profits (with inventory and capital consumption adjustments ) declined 2.4% (quarterly) ($37.8bn) in the second quarter after falling 1.1% ($17.6bn) in the first quarter and are down 7% since last year, the worst since 2001.

Profit from domestic industries dropped 1.9% in Q2 after rising 0.5% in Q1. The entire decline came from a 6.0% fall in nonfinancial industry profits.

So much for the good news…