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Economic Recovery to Begin in September


August will mark bottom of the recession.


Jack Lavery is the former Global Chief Economist at Merrill Lynch and author of The Lavery Insight economic newsletter offered exclusively on Minyanville. This is a free issue sent to subscribers earlier today.
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Q2 GDP Falls Less Than Expected; Faster Inventory Liquidation Bodes Well

The Commerce Department released this morning its "advance" report on second quarter real gross domestic product (real GDP). In each of the next 2 months there will be revisions to the 2Q:'09 real GDP headline and the line item detail. On August 27, Commerce will release it "preliminary" report on real GDP in 2Q:'09, and on September 30 Commerce will issue its "final" estimates for 2Q:'09 real GDP and all of its detail.

Today's release shows real GDP in 2Q:'09 receding by only 1.0% annualized from the immediately preceding quarter, less of a decline (better) than either I or the market consensus expected. The 1% decline shows the economy still receding in the second quarter, but at a much slower rate than the 5.4% annualized drop in real GDP in 4Q:'08, and the 6.4% annualized fall in 1Q:'09.

The Commerce Department's Bureau of Economic Analysis (BEA) today issued revisions of data for the last 5 years. One noteworthy change is that 4Q:'08 previously had the more than 6% decline, while 1Q:'09 had the more than 5% annualized drop. Effectively, those headlines were reversed. The headline rates deteriorated for 3Q:'08 to an annualized decline of 2.7%, worsening to a 5.4% annualized drop in 4Q:'08, followed by a still deeper 6.4% fall in 1Q:'09.

Also, 1Q:'08 now shows an annualized drop of 0.7% in real GDP. Most of the revisions were downward to quarters since the December 2007 start of the present recession, per the National Bureau of Economic Research (NBER). In fact, the year-over-year (YoY) decline in real GDP in 1Q:'09 now shows real GDP dropped 3.3% YoY following the revisions, deeper than the 2.5% comparable YoY decline, before the revisions released today.

As I expected, the significantly faster pace of inventory liquidation in 2Q:'09 was a major drag on real GDP. The consumer surprised on the upside with a 0.1% annualized gain in 2Q:'09, rather than the decline expected. Real net exports had their expected positive contribution to 2Q;'09 real GDP, but for a much different reason than expected. Exports were weaker than expectations, but imports dropped much faster than expected, a refection of the woeful weakness in domestic demand.

The best takeaway from 2Q:'09 real GDP is that the dramatically faster rate of inventory liquidation achieved in the second quarter sets the stage for moderate real growth in the third quarter. I continue to see August 2009 as the bottom of the recession, as I first outlined in An Economic Trough on the Horizon?, and September '09 as the first month of economic recovery.

ECI Rises More Than Expected, but Y/Y Momentum Continues to Slow

The Employment Cost Index (ECI) rose 0.4% in 2Q:'09, faster than market consensus expectations, as well as my own. The wages and salaries component edged 0.4% higher, while benefit costs increased 0.3% in the second quarter.

But, the real story is that the year-over-year (YoY) momentum of employment costs is actually slowing. The ECI in 2Q:'09 is up only 1.8%, an historic low. In 1Q:'09, the ECI was up 2.1% YoY, and in 4Q:'08 employment costs were up 2.6% YoY. The slowing momentum of the ECI is also present in both of its components: wages and salaries, as well as benefit costs.

Employment costs are likely to slow further, in our view, in the third and fourth quarter, given lingering labor market deterioration. This will serve, all other things being equal, to make corporate profits better than otherwise would be the case.

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