US GDP comes in at minus 1%

Submitted by Edward Harrison of Credit Writedowns.

Down 1.5% was the consensus expectation. But Q1 was revised down to minus 6.4% from 5.5%. The GDP Deflator for Q2 came in at 0.2%, which shows that disinflation risks tipping into deflation still.  The dollar is weaker and the short end of the treasury curve is up massively on these data and revisions.

Also, as I indicated Wednesday, the 2008 numbers were revised down. Q1 2008 was revised from positive 0.9% to negative –0.7%. Q2 2008 was revised way down as well from 2.8% to 1.5%.  Q3 2008 was also very negative, now –2.7%. This confirms the December 2007 recession call.

There was a $140 billion reduction in inventories in Q2.  I have been saying for some time that this would set us up for lots of upside come Q3 and Q4 as the inventory purge dissipates.  So, we will get a technical recovery in my opinion. The question is whether there is any underlying demand uptick behind the inventory changes. In the data below from the BEA website, you can clearly see highlighted in red on the right that consumers are not even spending on basic items.  Spending on non-durable goods was down 2.5% annualized.  That is not good.

My overall take here is this:

  • The downward revisions to 2008 should have been expected. They confirm how deep the mild depression was.  It started in December 2007, creating a weak economy early in 2008, and only intensified due to the meltdown post-Lehman.  Those like Larry Kudlow who were saying well into 2008 that no recession was going to occur were misguided.
  • Because inventories have been purged so much in Q1 and Q2, I fully expect much better numbers in Q3 and Q4.  Remember, a less negative inventory number translates into a net ADD to GDP.  So, we don’t need to build inventories, only purge them less.  That’s a guarantee for Q4 if not Q3.
  • However, the fly in the ointment is consumer demand. It  is still weak.  Look at non-durable spending.  If we don’t see a significant uptick come Q3, you should be worried.
  • My call for Q4 2009 or Q1 2010 end to the recession still stands.

BEA release:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of 1.0 percent in the second quarter of 2009, (that is, from the first quarter to the second), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP decreased 6.4 percent.

The Bureau emphasized that the second-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 3). The "second" estimate for the second quarter, based on more complete data, will be released on August 27, 2009.

The estimates released today reflect the results of the comprehensive (or benchmark) revision of the national income and product accounts (NIPAs). More information on the revision is available on BEA’s Web site at, including links to an article in the March 2009 issue of the Survey of Current Business that discussed the changes in definitions and presentation that have been implemented in the revision and to an article in the May Survey that described the changes in statistical methods. The September Survey will contain an article that describes the results of the revision in detail. The Web site also contains FAQs and other information about the revision.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. Edward Harrison

    Just to be clear, I am expecting a U- or W-shaped recovery on the back of this.

  2. Anonymous

    I think it will be a W recovery. After inventories are rebuilt manufacturers will discover that there are still no buyers. Look at the cars for clunkers to depress demand after is over. Same for RE in CA

  3. ccie779

    It will be a VL shaped recovery.

    Government spending makes atleast 40% of today's economy and would be interesting to see when that figure comes down.

  4. PacoCanada

    I also fully expect a W, unfortunately. The second dip will come when the govt stimulus effect fades away, some time in late 2010 or 2011. As all mention, there needs to be a resurgence of "non stimulus" (i.e. private-sector-led) growth, which should take the lead after stimulus effect…

    The problem seems to be in the transition between the hospital and the street:

    1) Government could perhaps come up with a second mega stimulus package, but the political context might not allow this to materialize.

    2) If there is a shift away from bonds towards equities due to a perceived upward shift in GDP, bond prices will fall, interest rates will rise, and it will make it that much more difficult for the recovery to really take hold. This could be countered by Fed interventions, however.

    3) With rising unemployment even months after the start of the recovery (as we all know happens), will households and firms have deleveraged enough to free up buying power to pave the way for recovery?

    Man I am worried!

  5. AN

    It's my understanding that we use _real_ GDP to remove effects of inflation, _nominal_ GDP would likely be rising at all times..

    However, what if we slide into deflation, and nominal GDP is negative, but deflated by the negative CPI gives a positive real GDP? How will that situation be interpreted? I guess it'll be good employment, but not as good for earnings and debt reductions.

  6. Anonymous

    Most people I know are scared "sh–less" about their jobs, debts, 401K's, etc. I think we've experienced a "generational" shift in consumer attitudes towards debt and spending. The deleveraging and defaulting hasn't even really begun yet. No lasting recovery is coming. What we've got going is the worlds largest ponzi scheme.

  7. Anonymous

    Barry Ritholz wrote in his Big Picture blog: "Bottomline: An improving, but weak report."

    How could Barry make such a basic error? Sure the 2nd derivative is improving, but -1.0% is not improving.

  8. Clinton

    According to Bloomberg y/y GDP is down 3.9% from 2nd quarter 2008. Personally, I expect 2nd quarter 2009 GDP to be revised down just like all the others quarters were.

    From the article:

    "GDP was down 3.9 percent from the second quarter in 2008, the biggest drop
    since quarterly records began in 1947. Last quarter’s decline was the fourth in a
    row, also the longest losing streak on record. "

  9. Donlast

    The US economy is being re-calibrated to a lower level of total output. The previous one was false based on a debt binge. So why assume inventories will be re-built? True, if inventory purge stops it will be a minor positive but so what? Note too that if it were not for the fact that imports fell faster than did exports the GDP metric could have been as much as -2.5%. Better than minus 5%-6%, Yes. But again, so what. If you are the bottom of a well down which you slipped by degrees and the last slip was less than the previous one you are still at the bottom of the well. Easing slippage provides no assurance that you can climb out.

  10. Cat

    -1% is the new +2%. Any negative number close to zero will be called "growth" from now on. "Not falling as fast as last time" will be hailed as improvement.

    People really do think that way. We only work well around relative numbers.

  11. Cat

    Donlast: You hit it. The most frustrating part of the last 2 years has been the constant refrain from pundits (and two administrations) that we're going to return to our previous experience of economic growth. Continuing this claim is completely irresponsible. It is setting people up with false expectations rather than preparing them for a more sober reality.

    If nothing else, the cost (and eventual scarcity) of oil will force us into a very much reduced level of productivity and already has. The importance of free energy in the growth seen post-WW2 simply cannot be overstated.

    An era has just ended. Any thinking person can see this, and many are relieved to see it go. Nobody can say for sure what follows, but it will be slower, less glamorous, and less energy intensive than it was. Probably by an order of magnitude. Just maybe, by more than that. Taking the opportunity now to prepare people for that should be Job #1, but we've not seen even the first step in that direction. People are going to wake up to a different world at some point and may feel cheated and lied to, and start looking around for someone (or some group) to vent their grievances against. The European experience of this in the last century does not inspire confidence.


  12. plschwarz

    "The estimates released today reflect the results of the comprehensive (or benchmark) revision of the national income and product accounts (NIPAs)."

    Am I wrong in assuming that the figures released today are a result of recalibration of the benchmark instrument, and that any direct comparison with earlier estimates must be made with extreme caution?
    I would assume (??) that recalibration of the instrument would be accompanied by using it on relevant earlier data to give a proper comparison. Am i naive

  13. PacoCanada

    Quite obviously, everyone here is sane and sees the cold reality we are all confronted with. Why the constant sidestepping by the Obama team? DO "change" from the past, please – just be casually sane, rational, and relistic. It would help a great deal in paving the way forward. And it would be SO refreshing!

    Emerging markets might kickstart their own internal domestic demand and take the flag for supporting world aggregate demand to which us Western economies could perhaps export to. Quite frankly, it seems to be the ONLY way out of this mess that could potentially give interesting positive growth going forward. Otherwise, indeed, 0 or 1%will be the new normalcy…

    What do you people think?


  14. Anonymous

    Wow, this from Yves??? Ah, it's Ed Harrison. Damn, I'm starting to detect blogger styles.

    Ed, how can we expect an uptick in consumer demand if people are still paying down debt?

    We KNOW interest rates have nowhere to go but up. Not the same as saying they will rise, but paying down debt now is guaranteed to be cheaper than paying later.

    Can the government pump another 10% increase into the economy?

  15. Hugh

    I agree with Donlast too. What indication is there that once companies have gotten rid of their excess inventory they will seek to rebuild that inventory? Yes, current inventory is a drag but wouldn't reduction and maintenance at a new lower level just produce fresno dan's flat line? Where does the up come from? As anonymous says, consumers are paying down debt or saving because of fears about their jobs and future security. So if companies aren't expanding and consumers aren't buying where is the uptick to come from? From government? How given current political conditions would this happen and even if it did, would it be enough and intelligently directed (as did not happen in the first stimulus plan)? And how do we know that this is not part of a deflationary spiral: cutting inventory and with it jobs which will reduce consumption further creating another inventory overhang necessitating further job cuts, etc.?

  16. Neal

    The GDP would at least be a minus 4% without the 12 percent increase in government spending.

    Does this really represent a sustainable growth pattern?

    So, if the GDP turns up in the next quarter on the basis of additional government spending, is this a real end to the recession, or just another numbers game?

  17. D

    There need to be a post on the "Cash for Clunkers" program that looks like it is going to vacuum up another few billion dollars in the next few weeks.

    One of the irony of this program is that clunkers that are at least 1984 are vehicles that by and large, have relatively modern exhaust emission systems and greatly downsized from the behemoth engines that are first generation electronic ignition / mechanical controls mated with inefficient drivetrains and transmission ratios of pre-1980 cars.

    The cars that qualify in the program, namely, 1984 or later models, are actually not the most inefficient vehicles on the road.

    If they are driven relatively few miles, they actually are very economic and energy efficient if the alternative is to consume energy to manufacture a brand new vehicle that is in turn, driven few miles.

    Furthermore, by spurring the auto industry to build and sell more new cars when we already know peak oil is upon us is simply not very cleverl

    This temporary lull in oil prices is deceiving buyers to buy more car and engine than they need.

    Furthermore, the industry is within 2 to 3 years of delivering a generation of gasoline fueled vehicles with much better mileage — e.g. the new Fords with direct gasoline injection and small turbo/super chargers.

    At the same time, we are still at the peak of the horsepower race – which like the tailfin race of another era – gave us sedans like a Toyota Corolla with standard ngines that develop over 130hp in the USA.

    This level of performance is far in excess of any reasonable, sensible need that a sedan optimized for fuel economy should have, and comes at the expense of lifetime fuel economy penalties in the form of heavier engines, transmissions, brakes, chassis, that is paid even in the absence of a lead footed driver.

    By having the US (and EU) governments purchase cars now to "stimulate demand", they have taken these buyers out of the market for many years, and perhaps, make it less likely for them to upgrade to a truly fuel efficient vehicle that will be widely available in a few years — when petroleum is back to $200 a barrel and gasoline is scarce and expensive at over $7 a gallon.

    Then there is the stupidity of the program administration — which required cars turned in to be disabled by having a mixture of water and sodium silicate and water poured into the engine and run — in effect, sanding the engine and making it unusable from the inside.

    The only problem is, scrap yards routinely salvage engines and transmissions from their wrecks — it is probably one of the best profit makers in a yard to salvage these parts and resell them to be either rebuilt or, if the mileage is low enough, placed straight into another car with a bad motor/transmission.

    Not surprisingly, scrap yards are now saying they may not accept the vehicles (unless they are compensated otherwise) because the disabled vehicles are nearly worthless, or worse, actually cost the scrap yard money to dismantle (drain fluids, etc.) them — except to be shredded and sold for scrap to China or other steel mills.

    No one that rammed this program through, which is really a car dealer bailout and bribery program to complement the GM / Chrysler / Auto Parts bailout program, truly understand energy economics.

    While the study of energy impact on the USA has yet to be done on this program, I have a suspicious hunch that this program will end up costing more energy than it saves.

    But Congress, in their rush to spend money, didn't think of that one.

  18. Ina Pickle

    The figures will just be revised downward. That, and by Q4 even more of the people who are losing jobs daily will have run through all of their unemployment insurance – and a goodly number from the beginning of the depression will have run out of even the extended benefits. Guys, if people don't have money, they don't buy things.

    What I want to know is where is the real economy going to come from. I have yet to hear one single person, ANYWHERE, suggest what we're going to do for an export-based economy. We had already become a new UK, exporting services (insurance and banking) as they did when their empire collapsed. What will we be exporting now? Where will the jobs be developed?

    Until someone can give me a solid answer on that, I don't believe that an end to the recession is in sight. I just don't.

  19. skippy

    @Jake, thanks for the link, at least some resemblance of critical thinking exists.

    All I see is a bump in the financial sector (speculative trading enhanced by government/citizens monies/backstops), nothing else. If projected profits upon plans laid down years ago are not realized, there will be no recovery.

    As Yves pointed out in a resent post "Anchoring" is a problem and I would expand to say, is it not the beast we must tackle in all things of man. Are not our lives, but theory, constantly subject to review internally/externally. To subject our selves to a solidified view of our own construct, regardless of the lack of knowledge we all know exists and for comforts sake, increase our pain.

    Economics is just one reflection of mans thoughts, will we allow its to dictate all future reflections of us? I hope not, for I feel we are better than that down deep if given the opportunity.

    Skippy…Never thought I would use a Titanic metaphor: We have hit the iceberg and now hear soothing Melody's on the top decks whilst lives in steerage contend with locked doors, water lapping at their feet…Elitist decorum dictates orderly actions till they notice the lack of life boats, removed for ascetic purposes…fridged waters evacuate life's breath bringing thoughts of their mortality/commonality with their lessors in steerage…see you at the bottom equal in diminish-ments embrace.

    PS. sorry for the drivel.

  20. Anonymous

    The banksters have staved off the real crash which would have provided the social opportunity for significant change away from the path we are on. Until and unless that crisis occurs those in charge are maintainig course. If and when the opportunity presents itself I hope that true critical thinkers rise to positions of influence over our future direction.

    I believe, as I am sure many others agree, that there are manifest solutions to many of our seemingly intractable social problems and what we need most is the collective will to move away from some of the social constructs we have.


  21. jm

    I'm skeptical about an inventory restocking uptick. Anecdotal evidence is that many small businesses are not going to make it past September or October. Rather than restocking depleted inventories, they're going to be dumping what stocks they have left out to the liquidators and/or surviving competitors. And consumers are going to start dropping off the unemployment rolls — unless new benefit extensions are voted through, but even if they are, unemployment benefits aren't large enough to replace lost wages.

  22. tom a taxpayer

    D @4:42 Excellent points. "Cash for Clunkers" is an environmental disaster. Scraping cars years before the end of their useful life is the height of profligate and wasteful consumption. The thousands of pounds of energy-intensive, highly-processed materials and advanced engineering equipment in cars is an enormous investment in energy and materials. It makes no energy, environmental or economic sense to destroy the engines and render the investment useless. The premise that buying a new car to get better gas mileage than the scraped car will save energy and be good for the environment is myopic and false.

    Like a mind, a car is a terrible thing to waste.

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