Back to Zero? Why Q2 Might Have Been the Worst Since the Recession

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The economy may not have shrunk, but it likely grew at the slowest rate since the recovery began

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In April we noted that the economy took a step back. In May, things got a little worse. The June economic data is still pouring in, but so far it isn't much better. Those three months make up the second quarter, and this Friday we'll get its first GDP estimate. Was the quarter's economic growth even more anemic than the first quarter's paltry 1.9% annualized rate? Or did the economy shrink?

At this time, the consensus estimate for second quarter growth is 1.6%, according to MarketWatch. Economists aren't just being pessimistic here. Considering the economic reports we've seen so far, it's hard to imagine a much better result.

Let's consider the four components of GDP. Using the economic data we've got through May and June, we can construct scenarios for growth for last quarter. I've done an analysis, which is explained in detail below. Here are the highlights:

Real Consumer Spending: Even with the most optimistic of estimates, consumer spending didn't likely do much for GDP. We know real spending declined slightly in April and May, while retail spending unadjusted for inflation rose a bit in June. So at best we'll see a small bump to GDP from this component. The range for consumer spending's contribution to GDP is likely between 0.2% and 0.4%.

Trade: Net exports didn't likely help much either. The trade gap swelled in May. Even if it declined in June by the most in two years, it will provide little help to GDP. If May's trade deficit remained intact in June, then we'll see trade hurt growth. The contribution to GDP here was likely between -0.3% and 0.0%.

Business Investment/Spending: This is arguably the hardest of all the components of GDP to estimate. It doesn't seem likely that businesses invested a lot on equipment, considering that their weakening expectations drove them to slower hiring. Existing home sales were down, while new home sales were up. Put together, residential investment probably didn't soar. That leaves inventories. Incomplete data indicates that they appear to be in-line with their rate of growth from the first quarter, but additional inflation means that their contribution to GDP will be smaller. This component probably added somewhere between 0.0% and 0.6% to GDP growth.

Government Spending: Treasury outlays show that defense spending rose in the second quarter, which will likely result in an uptick in federal spending. Meanwhile, however, we can be pretty sure that state and local spending continued to fall. The Treasury's extraordinary measures to prevent puncturing the debt ceiling are believed to have made state and local budget management more difficult. We also know that state and local government jobs declined in the second quarter. This means that government likely contributed somewhere between 0.1% and 0.6% to GDP growth.

If you add these four components together, you find that it's pretty hard to realistically imagine GDP growth exceeding 1.6% in the second quarter. But it isn't crazy to see it drop all the way to near zero if the more pessimistic estimates are considered. The leading positive contributors will likely be business investment and government spending, both of which also happen to be very difficult to estimate.

This makes Friday's report extremely important. If GDP growth matches the consensus projection of 1.6%, which is at the high end in the estimate explained here, then it will match growth in the third quarter of 2009. That's also the weakest since the U.S. first saw GDP rise again after declining for four straight quarters. If it falls in-between the two scenarios explained here, it will mark a new recovery low.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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