GDP Numbers: Actually Not That Bad

Gross Domestic Product (GDP), measures how fast or slow the economy is growing.  GDP reflects the final value of all output regardless of whether it was sold or placed in inventory.  The current report reveals that Real GDP (GDP adjusted for inflation) is slowing down from 3.7% growth in the last quarter to only 2.4% in the second quarter.  One thing to keep in mind is that this is the advance estimate so it is based on source data that are incomplete or subject to revision.  Lets just hope the revision isn't downward as 2.4% is already severely below most economists expectations.

Things included in the report:

Imports of goods are up 35.4% which is a sign that Americans are spending more (although this did put a damper on the GDP number).

Durable Goods only grew 7.5%- although this is not surprising given the severe cutback in the availability of consumer credit. Also one in four Americans has a credit rating of less than 600 which essentially prevents them from getting any credit for at least a while to come. 

Gross Private Domestic Investment- what businesses invest in plants plants and equipment (this number grew 28.8% which is healthy). This series tends to be ridiculously volatile but we'll look at it anyway.  Most of the increase has stemmed from nonresidential investment in equipment and software which saw a 21.9% increase and a surprising increase in residential investment of 27.9%.  Residential investment includes single family homes and apartment buildings.

Also the government came to the rescue somewhat with non-defense government consumption expenditures seeing a 13% increase.  This means that things are indeed getting built and that the government is responsible for putting some people to work.

This recession has been characterized by some (including Christina Romer doing a recent interview with the WSJ)  as a problem of deficient aggregate demand.
To get a better measure of pure demand within the U.S. economy look at gross domestic purchases under "Addenda".  This measure sums up total purchases by U.S. consumers and businesses regardless of whether the product was actually made in the U.S. or somewhere else.  This measure excludes exports and includes imports.  This measure is up 5.1% which is the largest increase in several years and definitely a positive sign.  Also an even better measure is final sales to domestic purchasers which was up 4.1%.  This measure excludes changes in inventories and exports to foreigners making this possibly the purest measure of demand.   So what have we learned? While the official measure of GDP is increasing at a decreasing rate the actual demand for goods by Americans has in fact been increasing at an increasing rate.   This is certainly better news than what most economist have you believe.   Furthermore, if final sales are increasing at a faster rate than GDP growth it is a sign of strong economic growth ahead as companies accelerate production to meet higher demand. 

Now for a look at deflationary risks:
Go to table 4 in the report.  Near the bottom of table 4 under implicit price deflator lies the deflator for gross domestic purchases.  Same as before this measure takes into account price changes from all purchases (including imports) and only saw an increase of 0.1%.  This is some scary disinflation that may soon turn negative to reveal deflation.

Another thing to look at is the Personal Consumption Expenditures deflator (or PCE deflator).  The Fed uses this measure and relies on it more than CPI because it is sensitive to ongoing changes in consumer spending patterns.  This measure is certainly showing disinflation 2.9% -> 2.7% -> 2.1% -> 0.1% and reveals that deflation is around the corner.