News reports on the revised second quarter GDP data released on Thursday and the June data on consumer expenditures released on Friday, included many comments from economists expressing surprise at the strength of the GDP data and the weakness of the consumption data. Neither report presented surprising information to people who seriously follow the economy. The almost exclusive source for the upward revision in the GDP data was a sharper decline in the trade deficit than had been previously reported. Since the trade data for June had already been released, along with a downward revision for the trade deficit reported in May, there was no basis for having been surprised by this upward revision. The data was already known. Similarly, the weak consumption report for July could have been inferred based on the weak retail sales data which had been reported earlier in the months. Real spending on retails sales (which accounts for approximately two-thirds of non-housing consumption) were sharply lower for June. As a result, it was virtually certain that consumption as a whole would be lower for the month. Any economist who was surprised by either the GDP release or the data on consumer spending simply was not following the data closely enough. To preempt surprise among economists, the July consumption data means that it is very likely that the 3rd quarter GDP data, which will be released the Thursday before the election, will show negative growth for the quarter. With the stimulus ending in July and the economy continuing to shed jobs in August and September, it is virtually certain that consumption, which is 70 percent of GDP, will fall for the quarter. Residential housing is almost certain to be down for the quarter also. Both federal and state and local government spending are likely to be close to flat, as budget deficits force cutbacks at the state and local level, and erratic increases in the timing of federal spending get reversed. The investment component (10 percent of GDP) is likely to show a small positive with equipment investment possibly offsetting a decline in structure investment. Trade is likely to show little improvement after the strong second quarter showing, especially with the economies of our trading partners weakening. Inventories will be a plus for the economy after being a big negative in the second quarter, but probably not enough to pull GDP for the quarter into positive territory.
--Dean Baker
