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Economy in Brief

Q2 GDP Unrevised on Net at 1.0% Fall; Hesitant Profits Recovery Continues
by Carol Stone August 27, 2009

The pace of real GDP change was unchanged in today's report from the Commerce Department, which showed a 1.0% rate of decline.  Inventories were revised lower but offset in the GDP tally by a smaller decline in domestic final sales and a larger push from net exports than were reported in the July release.  Notably, these latter two revisions put total final sales up at a 0.4% rate, the first quarterly increase in a year.

This GDP report marks the initiation of new nomenclature by the Commerce Department for the order of the GDP releases.  Formerly, the "advance" report was followed by the "preliminary".  Now the report after the "advance" is called "second release" and will be followed next month by the "third release".  Surely this is an improvement for the last here, formerly known as "final", but which was revised soon enough yet again in annual and comprehensive revisions, so it was hardly "final".

Among categories of demand, revisions were generally modest and favorable.  Consumer spending is now estimated to have fallen at a 1.0% annual rate compared to 1.2% before and residential investment is down at a 22.8% pace instead of the 29.3% reported earlier.  Exports were revised to a 5.0% decline from 7.0% before, and government consumption and gross investment was increased to 6.4% growth from 5.6%.  On the downside, nonresidential investment was lowered to a 10.9% rate of decline from 8.9% reported before, with the cut coming from structures; equipment outlays were lifted a bit.  Imports remained down at a 15.1% rate, as goods imports were "more weak" and service imports were "less weak".

The inventory reductions are even more impressive than they were in the earlier report.  Previously seen at $141.1 billion SAAR in chained 2005 dollars, the new data show them at -$159.2 billion.  Every major stage of distribution cut stocks sharply: manufacturers, wholesalers and retailers.  We often attribute such major adjustments to the auto industry, and it certainly participated, but durable and nondurable goods wholesalers and "other" retailers also reduced their merchandise on hand.  This said, the contribution of inventory change to the GDP decline was not as severe, 1.4%, as it had been in Q1, 2.4%.

One reason to cut inventories -- and labor forces, for that matter -- is to cut costs.  The performance of profits indicates that progress has been made on this front.  Corporate profits in Q2 rose 5.7% pre-tax, including IVA and CCAdj, from Q1 and were below Q2 2008 by "just" 10.9%.  The year-to-year movement in Q1 had been -19.0% with -25.1% in Q4.  By broad sector, financial industries saw their quarterly profits gain 16.7% in Q2 from Q1; they had nearly doubled from Q4 to Q1, gaining 95.1%.  On a year-to-year basis, financial company profits are still down, with Q2 at -14.3%; on this 4-quarter trend, profits have declined continuously since Q3 2006.  Nonfinancial company profits have contracted less consistently, although they continued a quarter-to-quarter decline in Q1, down 6%.  Q2 saw a partial reversal to an increase 4.5%.  The year-to-year trend remains down, by 7.7% in Q2; this has been negative since Q2 2007.  Thus, these operating profits are beginning to recover, but with such hesitation that might not yet inspire much confidence.

The U.S. National Income & Product Account data are available in Haver's USECON and the USNA databases.

Chained 2005$, % AR 2Q '09 (2nd Release) 2Q '09 (Advance) 1Q '09 2Q Y/Y 2008 2007 2006
GDP -1.0 -1.0 -6.4 -3.9 0.4 2.1 2.7
  Inventory Effect -1.4 -0.8 -2.4 -1.0 -0.4 -0.4 0.1
Final Sales 0.4 -0.2 -4.1 -2.9 0.8 2.5 2.6
Foreign Trade Effect 1.6 1.4 2.6 0.9 -1.2 0.8 0.1
Domestic Final Demand -1.2 -1.5 -6.4 -3.8 -0.4 1.7 2.5
Chained GDP Price Index 0.0 0.2 1.9 1.5 2.1 2.9 3.3
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