Thursday, August 05, 2010

2nd Half Slowdown Update

by Bill McBride on 8/05/2010 05:11:00 PM

My view is that the real GDP growth rate will slow in the 2nd half, and I've posted a list of the reasons over the last few months:

1) less Federal stimulus spending in the 2nd half of 2010,
2) the end of the inventory correction,
3) more household saving leading to slower growth in personal consumption expenditures,
4) another downturn in housing (lower prices, less residential investment),
5) slowdown in China and Europe and
6) cutbacks at the state and local level.

Note: The first half real GDP growth rate was reported as just over 3% annualized (before revisions).

There have been some updates:

  • The qualification dates for the various tiers of Federal unemployment benefits have been extended through Nov. 30. This was also made retroactive to June 2nd.

  • The Senate approved a $26 billion aid to the states package today. This will be approved by the house and signed into law shortly. This bill will reduce the cutbacks at the state and local level - although more cutbacks are still coming.

  • The personal saving rate was revised up sharply in the annual revision to the GDP report. In June, the personal saving rate was reported at 6.4%. My view has been that the saving rate would rise to around 8% or so as households slowly repaired their balance sheets (there is nothing magical about 8%). During a period with a rising saving rate, household consumption grows slower than income - and that acts as a drag on consumption. Although I expect the saving rate to rise further, most of the drag from a rising saving rate appears to be behind us.

  • Although I thought the inventory correction was mostly over at the end of Q1, it appeared that inventory adjustment contributed 1.05 percentage points to Q2 GDP growth (annualized real rate). The Manufacturers’ Shipments, Inventories, and Orders report for June suggests this initial estimate was too high. As Phil Izzo at the WSJ noted earlier this week, this means a downward revision to Q2 GDP of about 0.5% (there will be other data released that might lead to revisions up or down). I still expect little contribution from inventory adjustments - and maybe even a drag - in the 2nd half of 2010.

    Overall I still expect growth to slow in the 2nd half of 2010, but this lessens some of the expected drag or pushes it out to Q4 or 2011.