Broad Weakness in Q2 GDP

The economy contracted at a 1.0% pace in the second quarter, according to the advance estimate from the Bureau of Economic Analysis. That’s bad, of course, but much better than the 5.4% and 6.4% pace of declines in the two previous quarters.

Whenever the GDP data come out, the first thing I look at is Table 2, which shows how much different sectors of the economy contributed to the growth (or, in this case, the decline). The most striking thing about Q2 is how broad the weakness was:

As the chart shows, Q2 witnessed declines in every major category of private demand: consumer spending, residential investment, business investment in equipment and software (E&S), business investment in structures, and exports. Wow.  To find the last time that happened, you have to go all the way back to … the fourth quarter of last year, when it was even more severe. But before that, you have to go back five decades to the sharp downturn of the late 1950s.

Not surprisingly, government spending helped offset the declines in private spending. Most of the boost came from defense spending, but state and local investment also helped (perhaps some glimmers of stimulus?).

A sharp decline in imports, finally, was the biggest contributor to growth in Q2, at least in an accounting sense. It’s important to choose your words carefully here, since declining imports are clearly not the path to prosperity. In a GDP accounting sense, however, import declines do boost measured growth. Why? Well consider the fall in consumer spending. That decline affected both domestic production and imports. GDP measures domestic production, so we need a way to net out the decline in consumer spending that was attributable to imports. That’s one of the factors being captured in the imports figure.

Note: If the idea of contributions to GDP growth is new to you, here’s a quick primer on how to understand these figures. Consumer spending makes up about 70% of the economy. Consumer spending fell at a 1.2% pace in the second quarter. Putting those figures together, we say that consumer spending contributed about -0.9 percentage points (70% x -1.2%, allowing for some rounding) to second quarter growth.

As I mentioned a few weeks ago, today’s GDP release is particularly important because the fine people at the BEA have gone back and made revisions to the entire history of GDP statistics. I will post again once I have a chance to review how history has changed.