2Q2010 GDP: Growth Rate Revised Down by One-Third

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The Bureau of Economic Analysis reduced the 2Q2010 growth rate in real gross domestic product (GDP) by one-third (from 2.4 to 1.6 percent), reflecting a smaller rise in inventories and a wider trade gap than initially estimated.

"The economy has slowed a bit and will probably continue to slow through the second half," said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina. "We're skating on thin ice, and we don't have a lot of margin for error."

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Other noteworthy details from the latest GDP report:

• The trade gap in 2Q widened to $445 billion, compared with an initial estimate of $425.9 billion, subtracting 3.37 percentage points from growth, the biggest reduction since record-keeping began in 1947. Imports grew at a 32.4 percent pace, the most since 1984, while exports increased by only 9.1 percent.
  
  
• Analyst Vincent Fernando pointed out that government spending comprised over half (0.86 percentage point) of the 1.6 percent GDP growth value -- one of the highest quarterly government contribution to GDP since at least 2007. The only quarters to beat it since the beginning of 2007 were 3Q2008 and 2Q2009 (+1.04 and +1.24 percentage points, respectively).
  
  
• Although overall private domestic investment remained smaller relative to 1Q2010, contributions to growth from both residential and nonresidential fixed investment increased in 2Q.

If there are any silver linings in what could be construed as discouraging data, these might be worthy of mention:

• Whatever the reason for the outsized drag from net exports, Federal Reserve Chair Bernanke does not expect it to be repeated: "Like others, we were surprised by the sharp deterioration in the U.S. trade balance in the second quarter. However, that deterioration seems to have reflected a number of temporary and special factors. Generally, the arithmetic contribution of net exports to growth in the gross domestic product tends to be much closer to zero, and that is likely to be the case in coming quarters."

• Another mildly encouraging detail, brought to our attention by James Hamilton, involves the first estimate of 2Q gross domestic income (GDI). According to economic theory, GDI should be exactly the same number as GDP. In practice, however, GDI and GDP often return slightly different results since they are constructed in part from different sources. Federal Reserve economist Jeremy Nalewaik has argued that GDI is sometimes a better measure than GDP for tracking the business cycle. The rate of growth of GDI has been coming in a little better than GDP lately. GDI showed a 2.3 percent annual growth rate for 2Q, about the same rate as the BEA’s initial estimate of GDP.