This morning, the Commerce Department published the much-awaited first look at US second-quarter GDP. You’re going to hear in the news that the recession is officially over, because the economy is reported to have shrunk in Q2 at a 1.0 percent annual rate. This compares with 6.4% in the first quarter. The report also includes a large downward revision to the Q1 number, as well as downgrades to consumer spending statistics for 2008.
Exactly what does it mean to say that the economy shrank by 1.0 percent in Q2? It’s a comparison of the value of the nation’s economic output between Q1 and Q2, expressed as an annualized percentage. The economy got smaller in Q2 compared to Q1, but at a much slower rate than it had declined in Q1 from Q4 ‘08. There’s a limit to how far you can keep declining. The economy is no longer in free-fall.
Financial markets are taking this report as borderline bad news, however. The thing that jumps out of the report is that all the improvement in the economy(which is to say, the decline in the rate of decline) is due togovernment spending at all levels. Consumers aren’t spending more. Rather, they’re saving more.
So are we creating the conditions for a return to private-sector growth? The answer isn’t necessarily no. I think we’re creating the conditions to broadly transition the economy from a consumer-directed one to a government-directed one. The vitality and dynamism of such an economy will be far less than what Americans are used to, but that doesn’t mean we won’t have growth.
I hope you work for a defense contractor or government-funded healthcare provider, though. (Government spending on defense rose over 10% in Q2.) It’s also going to be very, very good to work for a government, since civil servants will get (and keep) gold-plated benefits, while private employees will get more uncertainty.
I’ve been saying this for five months now, in this space and elsewhere: this outcome perfectly matches the on-the-ground trends I’ve been seeing in my own businesses this year. Defense companies and health companies are spending. The bailed-out financial companies are spending. The governments are spending.
Everyone else is cutting.
a drop in GDP of 1% is not good news...
DONTREADONME Friday, July 31st at 1:56PM EDT (link)but heh, the AP really wants it to be, so we get the obligatory experts/analysts expected 1.5%.
Look mom, I can do it too, experts shocked that global termperatures failed to rise accroding to expectations of 0.2 degrees C.
“The UN is right? you can’t be any more “un”; Than you are right now, the UN is undone, Another mushroom cloud, another smoking gun, The threat is real, the Locust King has come, Don’t tell me the truth; I don’t like what they’ve done, Just give me ammo for the United Abominations”-Megadeth
Consumers are paying off debt, not saving
jimmuy8 Friday, July 31st at 2:02PM EDT (link)The fellow over at The Market Ticker shows how the “savings rate” put out really isn’t a measure of savings like most people think, e.g. money in the bank.
Consumers are cutting back and trying to pay off debt, they aren’t hoarding money under their mattress or in savings account.
http://bit.ly/mxTIS
http://bit.ly/rWxhk
If you follow the graph, he says there needs to be something like a 30% contraction to get us back to the 1980 levels. That’s 6% per year for 5 years or 3% for 10–that’s a pretty awful scenario that I hope we won’t see but, I’m afraid it’s inevitable.
Something has to break.
Well, the hemorrhaging has slowed, but the patient is still critical
Marcus_Traianus Friday, July 31st at 2:08PM EDT (link)Agreed, this report and general political reaction masks the real issues.
We have yet to encounter and fully discover the affects of Obama’s policies on any recovery- only that his actions will generally slow overall growth, have a severe negative impact on businesses- especially small/medium sized, increase the tax burden on individuals and slow real job growth outside the government sector.
When looking at the 5 and 7 years auctions this week, one can only wonder what the future will bring. How long will the Indirect bidders keep saving the day?
“Both of our political parties, at least the honest portion of them, agree conscientiously in the same object—the public good; but they differ essentially in what they deem the means of promoting that good. One side believes it best done by one composition of the governing powers; the other, by a different one. One fears most the ignorance of the people; the other, the selfishness of rulers independent of them. Which is right, time and experience will prove.”.Thomas Jefferson
Contributor to The Minority Report
The Treasury auction results were bifurcated
Francis Cianfrocca Friday, July 31st at 3:14PM EDT (link)The 2 and 5 years were messy and underbid. The 7-year went great, surprising everyone by trading through the market instead of tailing. I heard chatter that someone had bid large on the 7-year, possibly to cover a short, so it could be an outlier.
I think that overall, the capital markets are pricing in a powerful recovery. I also think we may be seeing the beginning of the next asset bubble, which will be in corporate bonds.
Have you looked at the corporate debt issues which have been pricing this week? There is hunger for this paper out there. Unless the yield curve flattens a whole lot, none of this makes sense.
Very mixed, blackie
Marcus_Traianus Monday, August 3rd at 10:01AM EDT (link)I have not settled on any particular outcome. While some encouraging signs are evident, others are not. The continued outlook on consumer confidence and employment are two big signs for me of a “mixed bag”.
The Treasury auctions last week ultimately told me nothing (although I am curious about the last minute $2b by on the 7-year. I am not very confident on the upcoming auctions which I believe may be more indicative since they are not coming at month end. Primary Dealers are going to be under substantial pressure to keep pushing Treasuries and I am just not sure where the runway will be.
I think the corporate debt activity is healthy and a positive sign, but some of that is being driven by the CDS exodus. The market smells big regulatory changes coming and will find another venue to trade in until that settles down (personally, I wonder if CDS will ever recover). This will benefit the better quality corporate issues where “protection” is not an issue. At the end of the day, inflation is still a wild card for me. I just can’t gauge what will happen with all that liquidity and have zero confidence the FED will “ratchet” things at the right time.
One thing I thought was interesting; Wal-Mart selling $83 odd billion in Samurai bonds. Any thoughts?
“Both of our political parties, at least the honest portion of them, agree conscientiously in the same object—the public good; but they differ essentially in what they deem the means of promoting that good. One side believes it best done by one composition of the governing powers; the other, by a different one. One fears most the ignorance of the people; the other, the selfishness of rulers independent of them. Which is right, time and experience will prove.”.Thomas Jefferson
Contributor to The Minority Report
Of course if there was a Republican President, headlines would be different
Finrod Friday, July 31st at 2:39PM EDT (link)Recession Continues Unabated
No End In Sight for Bad Economy
GDP Continues Downward Spiral
etc.
—
Finrod’s First Law of Bandwidth:
A picture may be worth a thousand words, but it takes the bandwidth of ten thousand.
Bingo
smitty Friday, July 31st at 3:29PM EDT (link)I thought the same thing I read the AP headlines. SO the economy sucked, but not as bad as we thought.
I should have tried that in school. Well dad I thought I was getting an F but GOOD NEWS, I got a D- lets celebrate!
Heh, that brings a Simpsons scene to mind
Finrod Monday, August 3rd at 12:41PM EDT (link)I don’t remember the episode but it’s mostly a Mary Poppins takeoff, but parodying a My Fair Lady song, as _Wouldn’t It Be Adequate_; where ‘adequate’ for Lisa is a B+ on a report card, but for Bart it’s a D-.
—
Finrod’s First Law of Bandwidth:
A picture may be worth a thousand words, but it takes the bandwidth of ten thousand.
Parasites 1, Producers 0
johnCV Friday, July 31st at 3:00PM EDT (link)My level of revulsion for all things governmental is rapidly boiling over.
Whew
toni100 Friday, July 31st at 7:08PM EDT (link)at least the fiance works for a defense contractor. The downside, we’ll never get married at this rate! Haven’t seen him in a long time.
Preliminary
lukematthews Friday, July 31st at 7:15PM EDT (link)This report is anything but clear. It is just a doctored bit of nonsense that will be revised downward later on. The first quarter data was worse than reported. This is political cover to make it seem the non-stimulus package is having an effect, which it is not.
That sounds kind of like saying...
bk Monday, August 3rd at 10:24AM EDT (link)Doctor: “Congratulations. You no longer have cancer.”
Patient: “You mean it’s gone into remission?”
D: “Oh hell no - it’s still growing, just not as fast due to all the drugs we pumped into that you’ve spent your life savings on.”
P: “Then WTF are you talking about?”
D: “I count slower growth rate as curing it so that I can advertise myself as a miracle worker.”