Monday, August 23, 2010

Revisionist GDP Numbers

On July 31st we reported the 2010 Q2 GDP numbers of 2.4%, of which 1.05% was from increase or rebuild of inventory and only 1.3% actual demand growth.  Of more concern, Q1 2010 was revised from 2.7% to 3.7%, which included a substantially revised inventory rebuild of 2.64%.  At the same time each quarter of 2007, 2008, and 2009 were also revised indicating the recession was worse then we were led to believe.

What Q2 2010 showed was spending needs to pick up, which is unlikely, and too much consumer and business spending go to imports.  Personal consumption expenditures (PCE) of 1.6% in Q2 slowed from 1.9% in Q1.

Q3 2010 will need to grow 3.4% to get to pre-recession levels.  With the economy slowing, unemployment growing, and housing prices (new existing home sales will be out August 24th) and inventory trending down that is not going to happen.  The July 30 Consumer Metrics Commentary on the GDP numbers shows the problem of the inventory rebuild number in the GDP going forward.  It should be noted that the GDP methodology used in the United States is completely different from that used by any other country, because the United States since 1980 has used a hedonic price index to adjust GDP numbers for a subjective value attempting to determine the economic growth from innovation, such as the economic growth from computers being replaced by more powerful computers.

With economic data for the last several months being mixed and beginning to show not only a slow down but the possibilities of contraction, analysts from various sources have been pouring over how the Q2 2010 GDP number might be revised on Friday, August 27th, and opining that it will be revised down to 1.9%, 1.4%, or even an extreme 1.0%.  With eyes around the world, particularly Europe, watching the United States for signs of recovery or slowing growth portending a possible near future contraction, the revision could have fear-confidence repercussions globally.  October Q3 GDP reports could begin to show contraction again in some European countries which have been expanding on tax increases, like Spain.  Will the fear-confidence factor grow into a sharp market correction?

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