Economy Grows 1.9% in 2Q

August 5, 2008--In the 2nd quarter, the GDP grew as strong consumer spending came on the heels of government rebate checks. Unemployment rose as employers again slashed their payrolls. Manufacturing remains sluggish as the ISM fell slightly. Expectations for the future rose, causing an improvement in overall consumer confidence.

 

Gross Domestic Product
The Bureau of Economic Analysis’ (BEA) first estimate of 2nd quarter GDP revealed that the economy grew 1.9% at an annualized rate. The BEA made several revisions to previous quarters, too. During the 1st quarter of 2008, the GDP grew at a tepid 0.9% annualized rate, down from 1.0% in last month’s report. A significant revision was made to the 4th quarter 2007 estimate, as the BEA estimated the economy actually contracted at a rate of -0.2% at an annualized rate. Its previous 4th quarter estimate projected 0.6% GDP growth at an annualized rate. Consumer spending and trade contributed the largest positives for GDP growth in the 2nd quarter, while a drop in inventories offset the positives. Armed with government rebate checks, consumers increased consumption by a 1.5% in the second quarter. Exports surged by 9.2%, while imports fell by 6.6%. Housing still remains a drag, though, not as large as before since its significance in the broader economy is diminishing due to the prolonged housing correction. In the 2nd quarter, residential investment decreased 15.6%, the smallest decline in a year. The report suggests inflation remains in check, even with surging energy and food prices. Wage inflation is unlikely to develop since jobs remain relatively scarce, thus, employees are not demanding higher wages. The faltering housing, credit, and labor markets continue to obstruct robust GDP growth and the economy will likely face outright declines by the end of the year.

 

Employment Situation
The unemployment rate inched upward to 5.7% in July. During June, it was 5.5%. Nonfarm payrolls declined by 51 thousand in July, the same decline as in June, which was upwardly revised from 62 thousand. Nonfarm payrolls have declined for seven consecutive months. Furthermore, the average workweek fell to 33.6 hours, thus hampering income growth. Average hourly earnings increased 0.33% for the month, and are up 3.4% for the year, but the increases are not keeping up with inflation. Since the beginning of the year, the economy has shed 463,000 jobs, though the losses have been slowing as of late. Weekly unemployment claims are still weak and deteriorating, so the problems in the labor market will be with us for the foreseeable future.

 

ISM Survey
The Institute for Supply Management (ISM) released its manufacturing survey last week and it dropped 0.2 points to 50.0 and now stands at the threshold that delineates between manufacturing growth and contraction. The relatively small decline will allow the Fed to keep interest rates unchanged. Overall the ISM remains consistent with an economy that is weak, but not in a severe downturn.

 

Consumer Confidence
Consumer Confidence increased slightly in July, rising 0.9 points to 51.9. In June, the index stood at 51.0, though originally it was reported at 50.4. The leading components of the survey showed mixed feelings about the economy. The expectation component led the gain as it increased 1.4 points in July. However, consumers remain worried about labor market conditions, as those that believed jobs were plentiful decreased 0.6 points to 13.5 while those that found jobs difficult to obtain rose 0.6 points to 30.3. Looking forward, consumer confidence should continue to improve, though slowly, as energy prices moderate and the tax stimulus checks work their way through the broader economy. However, a return to record-breaking energy prices or a wobbly labor market could send the index downward.