This is another component where we have some decent data at this point, though we're still lacking the numbers for June. Through May, the trade deficit had grown significantly.
- Optimistic: You could assume that in June the gap shrunk by the most it has in two years, which would result in around a 0.2% boost to GDP growth.
- Pessimistic: If the gap was unchanged from May to June, then trade subtracted around 0.3% from GDP growth.
This is arguably the hardest of all the components of GDP to estimate. Let's split it up into its component parts:
Businesses didn't likely invest a lot during the second quarter. Weakened expectations could have easily resulted in less money going to things like equipment and software as expansion plans slowed.
- Optimistic: Nonresidential investment grew at the same weak rate as it did in the first quarter.
- Pessimistic: It was completely flat.
Home sales didn't likely help much. Existing home sales were down in the second quarter by about 5%, while new home sales remained at a very low level but were up around 8% through May (we don't have June's data yet here).
- Optimistic: Residential investment was flat.
- Pessimistic: A small 1% decline in residential investment.
Again, here we lack June data. But April and May inventory growth has approximately matched the rate in the first quarter. That doesn't take the second quarter's much higher inflation into account, however.
- Optimistic: Inventories grew at one-third of the pace as they did in the first quarter.
- Pessimistic: They were flat.
Taking these three components into account:
- Optimistic: Business investment added 0.6% to GDP growth.
- Pessimistic: It added nothing.
The Treasury's monthly outlays shows Defense spending rising in recent months. This component tends to drive federal spending. So let's leave nondefense spending flat, which was the case from the fourth quarter of 2010 to the first of 2011.
- Optimistic: Federal spending rose by 6% -- slightly more than the amount by which Treasury reports defense spending rose.
- Pessimistic: That estimate could give too much credit to defense, so instead let's say it only boosted federal spending by 4%.
State and Local Spending
Estimating state and local spending is even more difficult. It has been declining over the past few quarters. Considering that the Treasury's measures to avoid piercing the debt ceiling were likely to have an adverse affect on the states and that employment statistics show that the state and local layoffs continued, state and local spending likely kept declining in Q2.
- Optimistic: The same decline as in the first quarter.
- Pessimistic: A decline 20% greater than in the first quarter.
Combining these two factors for the government's contribution:
- Optimistic: Government spending adds 0.6% to GDP growth.
- Pessimistic: It adds just 0.1%.
Very Different Scenarios
Through this analysis, you find that the optimistic assumptions put you near the consensus estimate -- at 1.6% growth for Q2. But if you use the pessimistic scenario instead, then you have zero growth, with GDP virtually unchanged from Q1 to Q2. Anywhere in between would almost certainly displease the market, as it would indicate a very anemic rate of growth.
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