Saturday, July 30, 2005

About the latest US GDP report

Yesterday's "advance" US GDP report for the second quarter contained several interesting news.

First of all, real GDP growth for 2002, 2003 and 2004 were revised down while inflation was revised up. This meant that while nominal GDP growth was unchanged it came in a more stagflationary form than previously estimated. For 2002 real GDP growth was revised down to 1.6% from 1.9%, for 2003 real GDP growth was revised down to 2.7% from 3% and for 2004 real GDP growth was revised down to 4.2% from 4.4%. Meanwhile, my prefered inflation measure (among government numbers. it too however underestimates inflation somewhat), the price index for gross domestic purchases was revised up from 1.5% to 1.6% in 2002, from 2.0% to 2.2% in 2003 and from 2.4% to 2.9% in 2004.

The prefered measure for Alan Greenspan and others who want to deny the inflation problem, the "core" ( excluding food and energy ) personal consumption expenditure deflator was also revised up with the current year over year increase revised up from 1.6% to 2%. This still greatly underestimates inflation ( primarily because of its exclusion of food and energy and its use of "home owners equivalent rent" instead of actual housing prices) and the inflation-deniers will likely say that 2% is still reasonably low, but since many have viewed 2% a crucial barrier this will clearly weaken their case.

As for the second quarter numbers, they show continued steady (+3.4%, although adjusted for terms-of-trade it was only +2.5%) growth driven primarily by strong private consumption (+3.3%) and a continued investment boom with residential investments increasing 9.8% and business investments increasing 9% . With continued increases in housing prices the boom in residential investments is likely to continue to increase at least for the rest of this year and with continued strong corporate profits business investments will also continue to grow fast at least for the rest of this year, probably well into 2006 as well. This is further underlined by bank lending statistics that shows commerical& industrial loans and real estate loans growing at a 15 to 20% annual rate.

The gross domestic purchases price index grew at a 3.3% rate the highest for years except for the 4+% rate reached during the first half of 2004.

One interesting aspect in this report is how it shows a sharp decline in business inventories. This could explain the unexpected small likely decline in the second quarter trade deficit and likely indicates that the deficit will rise again during the third quarter as inventories is starting to be rebuilt.

This report is highly consistent with the predictions I made in my February 2005 Las Vegas speech "The Outlook for the World Economy"(Or "The Future of the World Economy") where I predicted continued steady growth this year primarily driven by booming business investments. Housing investments have been somewhat stronger than I thought , but otherwise things have developed just as I thought they would and there is no indication now that would cause me to revise the forecast for the rest of the year. And I expect that as long as house prices and corporate profits remain strong growth will continue, although at the price of continued worsening of the imbalances in the form of high debt levels, worsened housing bubble and higher current account deficit, all of which means that problems will arise when the imbalances become just too big to be sustained.


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