Saturday, September 29, 2012

The US Economy Is Much Weaker Than We Thought

At the end of August I wrote "Q2 GDP - Nothing Good Happening Here" wherein I stated:  "With GDP currently at 1.7%, as of the latest estimate, the decline in overall PCE, Goods, and Durable Goods, is very concerning about the next couple of quarters ahead. While the pick up in services spending (haircuts, accounting, legal, etc.) is currently keeping the current quarters GDP afloat - service related spending does not lead to substantially stronger economic output in the future. The real economic drivers are the manufacturing of goods, and unfortunately, that is where weakness is developing."  The recent release of the final estimate of Q2 GDP, and the September's Durable Goods Report, confirmed that indeed the economy was far weaker than the headline releases, and media spin, suggested.
While the media quickly glossed over the surface of the report there were very important underlying variables that tell us much about the economy ahead. The first chart below shows the differences between the 1st and final estimate of 2nd quarter GDP.
 I have put the basic formula of the GDP calculation at the top of the chart and circled the relevant segments. The revisions between the first and final estimates of 2Q GDP showed that personal consumption expenditures (PCE) was just $0.5 billion stronger than originally estimated.  However, this reflects a sharp downward revision of 90% from the 2nd estimate which had shown a $4.9 billion increase. 

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