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Five Reasons to Be Skeptical About Second-Quarter GDP


Drilling down, this was a low-quality beat.

It's rarely useful to analyze preliminary GDP numbers. Everything that's reported is backward-looking, and should already be more or less known due to prior monthly economic data releases. Besides, there must always be substantial doubts regarding the usefulness of these numbers due to the fact that they are subject to very large revisions.

However, let us make an exception to this usual state of affairs since these are extraordinary times.


1. Real GDP growth contracted by -1.0% versus consensus expectations of -1.5%. This is a nice beat, but still within the margin of error.

2. The change in private inventories subtracted about -0.8% from overall GDP growth. Therefore, real final sales (GDP -- change in private inventories) decreased by only 0.2%. However, I would note the following: The inventory drawdown surprised me, so I will therefore not be surprised to see substantial future revisions here.

3. On the negative side of expectations, real personal consumption contracted by -1.2%. Durable goods consumption decreased by -7.1%, non-durable goods decreased by – 2.5% and services were relatively more resilient registering an increase of 0.1%. Private investment declined by -20.4% with fixed investment having declined 13.5%, residential investment declining by 29.3% and business investment having declined by -8.9%. These are dismal numbers and somewhat worse than I expected.

4. With such dismal numbers as those above, and an inventory contraction, how did the overall GDP number surprise to the upside? First of all, imports fell dramatically faster than exports – 15.1% versus 7% respectively. Thus, the change in net exports contributed +1.38% to GDP. Second, government expenditure rose by 10.9%. Looking forward, both of these contributions to GDP are neither particularly heartening nor sustainable. Thus, the "quality" of the headline number is somewhat diminished.

5. Note that real gross domestic purchases – purchases by US residences no matter where produced -- contracted by -2.3% in 2Q. This is obviously much better than the 8.6% contraction in 1Q. However, by historical standards, it is still a pretty steep rate of decline.

Overall, I would say that drilling down, the headline "beat" was of low quality. And from the point of view of my own forecasts, the numbers were somewhat disappointing. However, I warn: The numbers are subject to substantial revision.

So, overall I don't see much to get overly excited about, or depressed about, in these numbers. The main thrusts of the results were broadly in line with expectations (and some of the deviations from expectations may be revised in such a way that better jive with projections).
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