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Q2 Advance GDP Strong +4%, “Cancels” Bad Q1

By on July 30th, 2014

The first look at GDP for Q2 was very positive, +4%, reversing the negative Q1 report. Below is the chart of real GDP with and without inventories, which shows underlying GDP growth in the +2% range when considered on a year-to-year basis. (click to enlarge)

GDP w wo inventories 073014


Inventories have been volatile in the last year, with Q1’s contraction bringing them back in line. This first report of Q2 GDP showed an increase in inventories outside of the average of $55 billion since 2010. The $93.4 billion rise in inventories in Q2 was almost as large as Q3-2013’s $95.6 billion. That was when inventories got out of control last year. It’s important to remember that the advance report of GDP is packed with estimates and not much hard data reporting, so revisions can be large. These are the data we have now, so we have to run with them.

This release of GDP data was a benchmark revision that revised data back for decades, but mainly for the last three years. GDP for 2011 and 2012 were revised down slightly and revised up for 2013 and Q1-2014. The first quarter “final” estimate was a real GDP contraction of -2.8%, which has now been revised to -2.1%.

The chart below shows the changes since the start of the recession in Q4-2007 to Q1-2014. (click to enlarge)

GDP revisions 073014


One thing the strong GDP report did was reduce concerns about an impending recession. As we’ve stated many times, the economy is muddling along, and while low growth rates mean recession possibilities are greater, it is still likely that there will not be one. The low growth rates should be of concern, but seem to be shrugged off, as the “new normal” is not so new anymore and is accepted as normal. The economy is still well below the long run growth rate since WW2 of about +3.3%. We have not had one of those years since 2004 and 2005, and prior to those, 1995 to 2000 had above average growth.

This Federal Reserve announced that they will continue to reduce their bond purchases, as planned.

The durable goods orders report sounded better on the surface, but on a PPI-adjusted year-to-year basis was rather ho-hum, and indicates that this GDP report for Q2 is likely to be tweaked down in next month’s revision. (click chart to enlarge)

Durable goods ppi adjusted 073014

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  1. 4 Responses to “Q2 Advance GDP Strong +4%, “Cancels” Bad Q1”

  2. By Eric Taub on Jul 31, 2014 | Reply

    Your commentary from January/February was much more negative – somehow you now have belief in this economy. Incredible how your opinion has evolved. Unfortunately, backward looking commentary is not very useful to people. I wish you had a more forward view instead of a restatement of past information.

  3. By Dr. Joe Webb on Jul 31, 2014 | Reply

    Let’s see, I said there might be another inventory buildup that may cause a similar problem as before, the economy is still underperforming at a +2% underlying rate that is muddling along, and that the poor durable goods report implies that the GDP report will be revised down. Yep, I’ve really changed my outlook to rosy :) My forecasts were in the economic webinar, and this blogpost did not change any of them. Next week will have more detail as we have the monthly recovery indicators table.

  4. By Eric Taub on Aug 4, 2014 | Reply

    Durable Goods + Private Investment is at 24% of GDP – this trends at 26% over the last 60 years. The Durable goods PCE is up 14% YoY and Real GDP is above 3% in 3 of the last 4 quarters. Looks to me like we have plenty more upside…

  5. By Brandon Aube on Aug 4, 2014 | Reply

    I’ll wait for the revision next month before I have any hope were not headed toward recession. With the Federal Reserve reducing QE I expect to see GDP numbers to match.