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Friday, August 27, 2010

GDP Q2 2010 - It Could Be Worse

The headline number is 1.6% for Q2. The full release in pdf format is here.

It might be more instructive to look at BEA's NIPA table giving real GDP in current dollars. You can look at this table from 2006 to Q2 2010 here.

Note that the peak of real GDP in current dollars (according to current figures) was in Q4 2007 at 13,363 trillion. We are currently at 13,191 trillion. Both Q2 GDP and personal consumption are almost exactly at the level of Q2 2007.

The low for this cycle, as currently measured, occurred in Q2 2009 at 12.8 trillion.

Going back to Q2 2007, it's worth looking at the underlying details. At that time Gross Private Domestic Investment (the main driving force for economic expansion) was about 2.2 trillion. In Q2 2010, it is about 1.8 trillion. To get the same level of GDP, our net exports have risen about 250 billion (07 -.7 trillion, 10 -.45 trillion), and government spending has risen .14 trillion. This means that although we do not have the same level of credit shock pending, nor do we have the huge consumption/production drag of the massive rise in oil prices, we do have a somewhat weaker base for growth.

In particular, I am a little worried about private inventories. They have risen for two quarters. The huge increase in rail metals shipments makes me think they are due to rise again this quarter. This rise in private inventories will only be sustainable if consumption can rise fast enough to keep it rolling through. If consumption doesn't, then this will turn into a drag in Q4.

Even if we pegged US population growth at an average 0.5% the last three years, much lower than normal, the population should have increased by 4.5 million. Thus our per capita consumption is down, and this tends to suggest that our per capita consumption should rise.

The figures for private inventories and government spending will be revised again next month, so we'll have to wait to get a better read.

If you look at Table 10 in the current release, you'll see figures for personal income ex current transfer receipts (government payments to or on behalf of persons) at the bottom of the table. In 2007 the level was 9.66 trillion. Personal current transfer receipts were 1.72 trillion. In Q2 according to this release personal incomes ex current transfer receipts finally started to grow markedly, growing about 70 billion. The trough was in Q4 09 at 9.109 trillion. In Q1 we increased a hair at 9.111 billion. The Q2 level is reported at 9.181 trillion. HOWEVER, personal current transfer receipts increased from 2007's 1.72 trillion to 2.29 trillion in Q2 (annualized). This explains EVERYTHING about our current fiscal crisis.

The total of personal current taxes and contributions for government social insurance (payroll taxes) for Q2 was 2,131.5. This does not even add up to cover our government payments to individuals. Compare this to 2007's total of personal current taxes and contributions for government social insurance of 2,448.2 (2.45 trillion) and personal current transfer receipts of 1,718.5 (1.72 trillion). Mind you, we were running a total deficit then even with the .7 trillion excess. And now we've got a deficit.

As (and if) the economy slowly continues to improve tax receipts will rise, but even the rosiest forecasts show that personal current transfers will rise faster. Unemployment insurance and hopefully some other subsidies such as food stamps will drop, but the increase in retirements and medical payments will overcome that drop.

Demographics is hard to overcome.

Damn, can't believe I posted that.
What's wrong with it? That's what I was thinking this morning.

Consumption patterns for older people are remarkably different than for younger.
Should be "demographics are hard to overcome".

On another note, have you noticed how much CRE
is occupied by health care related businesses ? In my small town I'm guessing 10%. Thats got to be unsustainable.

How hard would it be to add sufficient lithium to the DC water supply?
Off topic M_O_M, but I thought of a potential good reason not to zero out capital gains rates.

The penalty paid for the inflation component of capital gains means that large corporations and the ultra-wealthy form a strong lobby against too much inflation. They can't just keep their money in foreign banks, because it'll just act as a wealth tax.

I suspect that the new IRS rules about foreign accounts reporting will go a long way toward preventing a real hyper-inflationary event here in the U.S. As a U.S. citizen (and corporate citizen) it's just really hard to do business in anything other than the dollar. That makes it difficult to have more than a temporary spike in commodities prices.
I think you can figure out the sustainability of the medical field just by taking a look at the buildings in your town. It used to be that the largest buildings were factories. Now, the largest buildings are medical facilities. How are people going to pay for medical care without places to earn a living?
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