A look at 2Q advance GDP components

A broad look at today's advance 2Q GDP report is available in my article, GDP falls 1%, worst appears over.

Here, I want to look at changes in some of the sub-components that make up GDP. Changes are on an annualized basis.

........1Q09........... 2Q09

• 0.6%........ -1.2%......... Consumption
• -50.5....... -20.4......... Gross private domestic investment (GDPI)
  
• -2.6 .............5.6.......... Government spending
  

Contributions to percent change in real GDP:

• 0.44......... -0.88.......... Consumption
• –8.98...... -2.64........ GPDI
  
• -2.36........ -0.83......... change in inventories (sub category of GPDI)
  
• -0.52.......... 1.12......... Government spending
  
• 2.64............ 1.38......... Net exports of goods and services

Although consumer spending made up 70.5% of the economy and manufacturing accounted for just 11.2% of total economic activity in 2Q, the volatile nature of the sector has exacerbated the recession as the chart above highlights.

The contribution provided by the balance of trade should not come as a surprise because the US trade deficit has narrowed, and exports improved in the month of May.

If we see another gain in exports in June, there is the possibility we could see an upward revision to GDP; however, inventories continue in a downward trend, which would detract from the broad measure of output.

Eventually, businesses will see the need to rebuild falling languishing stockpiles, which will aid economic activity.

One final point, the 50.5% decline in GDPI in 1Q is nearly incomprehensible. The drop in 2Q shows pressure is easing. But the contraction in manufacturing that we have witnessed highlights how badly the falloff in demand that followed the credit squeeze last year jarred manufacturers.

Chicago PMI gains ground but remains negative

The Chicago Purchasing Managers' Index, which is a look at manufacturing conditions in the Midwest, increased to 43.4 in July, up from 39.9 in June. The index is more volatile than the ISM Manufacturing survey, which will be released on Monday and is a closely-followed look at conditions across the country. A reading of 50 suggests neither growth nor contraction in the sector.

At its current level, the Chicago PMI stands at its highest reading since last October, signaling that recessionary conditions continue to ease. But at 43.4, it sits below the ISM, which may be due to the heavy concentration of auto-related companies in the Midwest.

Companies involved in manufacturing have slashed production at a rapid pace in order to move excess inventories. We have seen goods on hand fall, and as sales begin to pick up, inventories should more closely line up with demand. When that happens, production will once again begin to rise.

 Economists polled by Reuters had forecast a July figure of
43.0.
(seasonal adj)

                       July  June    May    April  March  Feb
NAPM-Chicago           43.4  39.9    34.9   40.1   31.4   34.2
Production             43.3  39.3    38.1   38.1   32.7   34.7
New Orders*            48.0  41.6    37.3   42.1   30.9   30.6
Order Backlog*         32.1  37.6    26.3   36.9   21.3   29.3
Inventories            25.4  34.2    31.5   30.6   34.9   33.0
Employment*            35.3  28.9    25.0   31.8   28.1   26.2
Supplier Deliveries*   49.6  43.1    43.0   45.4   48.4   51.0
Prices Paid            35.0  36.3    29.8   28.4   34.1   37.8
The * indicates components used to calculate index.
Source: Reuters

Japan deals with nasty data

CPI falls at record pace, jobless rate rises

The core rate of inflation in Japan, which excludes fresh food, fell at its fastest pace ever, while the jobless rate increased to a six year high.

The core CPI declined 1.7% from one year ago, down from May's drop of 1.3%, signaling that deflationary pressures are growing in the world's second largest economy.

Meanwhile, the jobless rate increased from 5.2% in May to 5.4% as rising exports and an improvement in manufacturing failed to buoy the labor market. Adding to the glum mood, the jobs-to-applicants ratio came in at 0.43, the worst ever.

The ratio measures the number of jobs versus the number of applicants, and the poor showing suggests unemployment is likely to go higher.

Natural gas inventories continue climb

Natural gas inventories increased 71 billion cubic feet (bcf) in the latest week to 3,023 bcf.

Working Gas in Underground Storage Compared with 5-Year Range

A more in-depth commentary is available at Examiner.com.

Jobless claims rise

Trend is in the right direction

Weekly initial jobless claims rose 25,000 in the latest week, in line with expectations, as the problems making seasonal adjustments over the last month that have been tied to auto layoffs "return to trend," according to Bloomberg News.

The four-week moving average fell 8,250 to 559,000 and weekly claims remain below 600,000, the level we saw before the seasonality issues surfaced.

The bad news: claims are still well above the level that would suggest the economy is no longer contracting. Weekly jobless claims are one of my favorite indicators of economic activity because it is a barometer on business sentiment.

A low level of claims signals confidence, while a high levels tells me that companies are still feeling the sting of the recession and feel the need to make job cuts.

The good news: the direction is encouraging and indicates the recession continues to ease.

Meanwhile, continuing claims fell 54,000 to 6.2 million. The downward trend in continuing claims, though, must be tempered by the fact that some of those who are still unemployed have come to the end of their six-months of compensation and are no longer counted in the federal statistics.

Beige Book shows recession easing, conditions stabilizing

The Fed's Beige Book is a summary of economic conditions in each of the twelve districts that make up the Federal Reserve and is based on comments from businesses and other contacts outside the central bank.

The report suggests that economic activity continued to be weak going into the summer. But most districts indicated that the pace of decline has moderated since the last release or that activity has begun to stabilize, which corresponds with remarks from many multinationals that point to stability heading into the second half of 2008.

Manufacturing remained "subdued" but was slightly more positive than in the previous Beige Book. Comments varied but on the whole they appear consistent with a forecast of modest and uneven recovery in manufacturing output beginning during roughly the coming six to twelve months.

The labor market remains weak, which has "virtually eliminated upward wage pressure." Wages and compensation are holding steady or falling in most districts. Upward price pressure was "minimal," the Fed's report noted.

In the meantime, residential real estate markets is still weak, but many districts reported signs of improvement. The Minneapolis and San Francisco regions cited large increases in home sales compared with 2008 levels, and other districts reported rising sales in some sub-markets.

Commercial real estate leasing, however, was described as either "weak" or "slow" in all 12 Districts, although the severity of the downturn varied somewhat across Districts.

Separately, a look at the difficult decisions Fed Chairman Ben Bernanke must grapple with over the next year are highlighted at Examiner.com.

Mortgage applications lag

Purchase Index stuck in neutral

Housing starts have jumped, new home sales just recorded the largest monthly increase in eight years, pending home sales are on an upward march, and existing home sales have been edging higher.

Even housing prices appear to be bottoming.  But the weekly survey of mortgage applications continues to lag, and a miniscule drop in the Purchase Index is the latest in what can only be described as a disappointing trend.

Given the preponderance of evidence that seems to be signaling that housing has already hit a bottom and is starting to recover, the Purchase Index, which should be acting like a leading indicator, may not be capturing all of the activity in housing.

Refinancings down in week

The Refinance Index is well off highs recorded back in the spring and fell modestly in the latest week amid an uptick in mortgage rates.

Not surprisingly, higher rates discourage homeowners, and the boom we saw in March and April when rates dropped south of 5% for a 30-year fixed mortgage has faded.