2Q2010 GDP: Speed Bump or Initial Phase of Double Dip?

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Real gross domestic product (GDP) -- the output of goods and services produced by labor and property located in the United States -- increased at a weaker-than-expected annual rate of 2.4 percent in 2Q2010, according to the "advance" estimate released by the Bureau of Economic Analysis. That rate of growth was considerably slower than the upwardly revised 3.7 percent of 1Q2010.

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The 2Q2010 rise in real GDP primarily reflected positive contributions from personal consumption expenditures (PCE); nonresidential fixed investment, private inventory investment and residential fixed investment (all components of private domestic investment or PDI); exports (part of net exports or NetX); and federal government spending (part of government consumption expenditures or GCE). Imports (the other part of NetX), which are a subtraction in the calculation of GDP, increased.

The 2Q2010 slowdown in real growth primarily reflected an acceleration in imports and a deceleration in private inventory investment that were partly offset by an upturn in residential fixed investment, an uptick in nonresidential fixed investment, an upturn in state and local government spending, and an increase in federal government spending.

“If this were an average recovery, the economy would be growing at a 6 percent rate at this point, which pretty much says it all about our current 2.4 percent number,” wrote John Mauldin, president of Millennium Wave Advisors. “Further, 2.5 years after the beginning of a recession, we [typically would already be] 8 percent higher than the prior high. [Instead,] as of today, we are not quite back to where we started, still down 1 percent. This is a very tepid recovery, indeed.”

One of the noticeable differences in the makeup of 2Q GDP growth is the contribution of residential fixed investment for only the second time since 1Q2006. Another is that GCE came “roaring back” in 2Q.

Neither of those components is likely to have much in the way of staying power, however. With foreclosures likely to top one million this year, ownership rates falling back to more traditional levels, and high unemployment levels leading to a proliferation of mortgage delinquencies, residential real estate probably will not contribute much to GDP in 3Q.

As for government spending, the bulk of the stimulus programs -- especially those that benefited state and local governments -- are going away in the latter half of the year. We expect a surge in spending leading up to November's elections, followed by a dramatic fall-off thereafter. Further, state and local governments are slated to cut back spending or raise taxes by almost 1 percent of GDP; also, as many as 500,000 government employees (and not just Census enumerators) may lose their jobs.