GDP: Nothing to write home about

The Commerce Department's Bureau of Economic Analysis released its "advance" estimate for second-quarter gross domestic product this morning. GDP shrank at just a 1% annual rate in the quarter (adjusted for inflation). The consensus forecast among the sad folk who while away their days predicting quarterly GDP numbers had been for a 1.5% decline, so there are a lot of happy headlines today about better-than-expected GDP numbers. Don't read too much into them.

Why not? First, there's the usual litany of GDP caveats. The number is for the quarter that ended a month ago, so it's old news. At the same time, though, it's not reliable news—much of the "advance" GDP estimate is extrapolation that will be revised as more data come in. On Aug. 27 we'll get the  "preliminary" "second" GDP estimate. Then on Sept. 30 it's time for the "final" "third" GDP number. which isn't final at all because it's subject to one of the Then come BEA's "benchmark" revisions every few years. They just released the results of such a benchmark revision today, in fact. Here's what 2008's GDP numbers were in the advance estimates and after the benchmark revisions.

Advance: Q1 0.6%, Q2 1.9%, Q3 -0.3%, Q4 -3.8%
Revised: Q1, -0.7%, Q2 1.5%, Q3 -2.7%, Q4, -5.4%

Somewhat different, huh? Add in all the measurement problems and judgment calls inherent in estimating real GDP growth (many of them having to do with measuring inflation), and it's pretty clear that the difference between 1% and 1.5% is probably meaningless.

Still, there were some interesting numbers within the GDP report. Consumer spending was down 1.2%, after rising slightly in the first quarter. Private investment was down 20.4%—not nearly as bad as the first quarter's spectacular 50.5% decline, but still pretty danged bad. What kept the GDP contraction to just 1% was a 5.6% rise in government spending (made up mostly of a 10.9% increase in federal spending) and an improvement in the balance of trade: imports fell 15.1% while exports fell only 7%.

What's it all mean? Conference Board chief economist Bart van Ark says the takeaway is that "with capital spending still falling and unemployment rising, neither investors nor workers are likely to see strong rewards anytime soon." But Ian Sheperdson of High Frequency Economics says that a bigger-than-expected $141 billion decline in private inventories (which should clear the way for future inventory increases), "coupled with the apparent surge in car sales under the clunker program, makes a positive GDP number in Q3 a good deal more likely." You confused? Me too.