Commerce Revises Second Quarter GDP Growth Down to 1.6%

The Commerce Department just released its revision to the second quarter GDP figure it put out last month. Rather than the 2.4% increase originally stated, the US economy expanded by a mere 1.6%, largely due to the biggest increase in imports in 26 years. Revisions such as this are standard, as the department checks its figures and firms up estimates. The 1.6% result still beat market expectations of 1.4%, but one cannot dispute that the recovery is decelerating.

Lucia Mutikani, writing for Reuters, noted "Growth in the last quarter was stifled by a 32.4 percent surge in imports, the largest since the first quarter of 1984, dwarfing a 9.1 percent rise in exports. That created a trade deficit, which sliced off 3.37 percentage points from GDP, the largest subtraction since the fourth quarter of 1947."

The impact of the trade deficit in this is best seen if one recalls that:

GDP = private consumption + gross investment + government spending + (exports - imports).

For the American voter, the key to the recovery is jobs. American businesses have thus far been reluctant to hire in large numbers. Yet Ms. Mutikani also noted, "they have been splurging on equipment and software, which also contributed to the surge in imports. Business investment was revised up to a 17.6 percent rate, the largest increase since the first quarter of 2006, from the previously estimated 17 percent pace."

Usually, the pundits fuss and moan if imports are up because that usually means Americans are buying the kinds of products that used to be made in the States: e.g., cars, radios and TVs, etc. However, if businesses have been "splurging" on imported capital goods, that implies that demand for labor should follow to maximize the utilization of those imports. In other words, importing a Komatsu crane suggests greater economic activity ahead than the importation of a similar value of cars.

Robert Dye, senior economist at PNC Financial Services in Pittsburgh, said, "There is no doubt we are losing momentum in the economic recovery. But if we define recession as two or more consecutive declining quarters of GDP, I think we are not going to go there." He's quite right. The US economy will bump along the bottom for a quarter or two more, but there won't be a double-dip recession. It will merely feel like one.

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