Economic Insight: War! What is it good for? Absolutely Everything... for GDP Growth!
The preliminary GDP report confirmed the contraction in GDP slowed in Q2. GDP declined "only" 1.0% in the quarter and beat consensus expectations of a -1.5% growth rate.
Market analysts have announced the end to the Great Recession and that a strong recovery is on its way.
But, is this true? Is the economy really ready for a strong recovery?
Unfortunately, we don't think so.
What happened in Q2?
Let's first review Q2:
GDP Component Growth Direction
Personal Consumption Expenditures Negative
Nonresidential Fixed Investment Negative
Residential Investment Negative
Inventory Change Negative
Exports Negative
Imports Negative
Government Spending Positive
The only sectors that produced a positive contribution to GDP were government spending and net exports. And net export growth was only positive because consumer demand for imports continued to fall faster than global demand for exports.
Personal consumption expenditures account for approximately 70% of GDP, and as you can see the numbers look abysmal.
Personal Consumption Expenditures Growth Direction
Motor Vehicles and Parts Negative
Furnishings Negative
Recreational Goods Negative
Other Durable Goods Negative
Food Positive
Clothing Negative
Gasoline Negative
Other Nondurable Goods Negative
Housing and Utilities Negative
Health Care Positive
Transportation Services Negative
Recreation Services Negative
Food Services Negative
Financial Services Positive
Other Services Positive
The fixed investment data looks worse.
Fixed Investment Growth Direction
Nonresidential Structures Negative
Computers and Software Negative
Industrial Equipment Negative
Transportation Equipment Positive
Other Equipment Negative
Residential Investment Negative
The only data that looks strong is from government spending!
Government Expenditures Growth Direction
National Defense Positive
Federal Nondefense Positive
State and Local Positive
What about Q3 and Beyond?
In order for a recovery to be sustainable we need to see positive growth in a broad spectrum of sectors, and right now we don't have it.
We expect the Cash for Clunkers stimulus package to have boosted motor vehicle sales enough to show positive growth in PCE in Q3. However, once the package concluded visits to dealerships dropped dramatically. There is no evidence to suggest motor vehicle sales will continue to grow at stimulus levels.
We expect inventories growth to occur over the next few quarters. This too may add a strong positive contribution to Q3 GDP. But unless consumer demand picks up, inventory production will remain stunted. By the end of 2010, inventory growth will again be a drag on GDP.
Analysts are suggesting fixed investment could possibly grow by the beginning of 2010 as the housing contraction ends. But, other than Q2 of 2007, fixed investment has been negative quarter-over-quarter since the middle of 2006.
The housing sector is still way too over supplied and any growth in residential investment will be minor. Industries have lots of excess capacity and consumer demand remains low. The fundamentals do not suggest a recovery in fixed investment until at least the middle of 2010.
The Elephant in the Room
That leaves the government as the sole source of demand.
According to various economic reports, the American Recovery and Reinvestment Act provided between $60 billion (IMF) to $100 billion (Christina Romer) in additional expenditures in Q2.
Analyses from Goldman Sachs and Moody's Economy.com estimated the fiscal stimulus increased Q2 GDP by 2.2 percentage points and 3.0 percentage points respectively. Without the stimulus plan, GDP would have declined between 3.2% and 4.0%.
Most of the stimulus monies went to securing state and local government expenditures. It's safe to say without the stimulus package, state and local governments would have provided a negative contribution to GDP. Federal nondefense expenditures also relied heavily on stimulus money.
So what's left that's sustainable without the help of a stimulus plan?
National defense expenditures provided the largest positive contribution to GDP in Q2. As the military ramps up spending to tackle Afghanistan, we expect national defense spending to continue to grow.
And you thought war was good for absolutely nothing.
--Jeff Rosen, PhD, Briefing.com
Grand Tetons at Sunrise
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