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US 2nd quarter GDP figures - investment remains the key issue for US recovery

US 2nd quarter GDP figures - investment remains the key issue for US recovery

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Published by John Ross
An analysis of the 2nd quarter US GDP figures showing that prospects for US economic recovery are determined by the state of US investment. A comparison is made with China
An analysis of the 2nd quarter US GDP figures showing that prospects for US economic recovery are determined by the state of US investment. A comparison is made with China

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Published by: John Ross on Jul 31, 2010
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08/01/2010

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US 2nd Quarter GDP
 
Page 1
US 2nd quarter GDP figures - investment remains the keyissue for US recovery
By John Ross, 31 July 2010The publication
1
of the US 2nd quarter GDP figures highlighted several striking andinterlinked structural trends in the US economy. These go considerably beyond the wellpublicised slowing of the US economic recovery. They confirm that the trajectory of the USeconomy will be determined by what happens to US fixed investment
The data confirms the US recovery is weak
Unsurprisingly, because it was anticipated, and as has been widely reported, the dataconfirmed the slowdown in US economic recovery.
2
Taking the latest revised figures,annualised US GDP growth decelerated from 5.0% in the 4th quarter of 2009, to 3.7% in the1st quarter of 2010 to 2.4% in the 2nd quarter.
US GDP remains 1.1% below its peak level in the 4th quarter of 2007. At the 2nd quarter’s
rate of growth previous peak US GDP will not be regained until the 4th quarter of 2010.Such figures have essentially decided the debate between those who argued that becausethe US downturn was very severe its economy would spring back strongly from recession,and those, such as the present author, who pointed to the underlying structural situation ofthe US economy and therefore argued recovery would be weak compared to previous USpost-war business cycles.
3
 Figure 1
 
US 2nd Quarter GDP
 
Page 2
 illustrates how much weaker the present US economic recovery is than in previouspost-war cycles. In the previous most serious post-war cyclical downturn, that following 1973,the US economy regained its previous peak level of production after eight quarters. In thisrecession after 10 quarters the US economy has still not recovered its peak GDP level.As also widely reported, the new GDP data now calculates the US recession was deeper,and started earlier, than previously estimated.
4
Peak US GDP is now analysed as havingoccurred in the 4th quarter of 2007 rather than the 2
nd
quarter of 2008 as previouslyestimated. The trough of US GDP in the 2nd quarter of 2009 is now calculated to have been4.1% below the cyclical peak level - the previous deepest fall in a US post-World Warrecession, that after 1973, was 3.2%.
The fall in US investment
The driving force of the depth of the US recession is also clear. It was due to the decline inUS fixed investment. As shown in 
 measured in constant 2005 prices, US GDP inthe 2nd quarter of 2010 was $147 billion below its 4th quarter 2007 level. However severalcomponents of US GDP are already above their 4th quarter 2007 levels - inventories are up$63 billion, government consumption up $112 billion, and net trade up $135 billion.Consumer expenditure was below its 4th quarter 2007 level but only by $80 billion. But USprivate fixed investment was down $412 billion
 –
entirely overshadowing all othercontributions to the recession.
Decline in investment centred in non-residential sector
This decline in US private fixed investment was not primarily due to the fall in residentialFigure 2
 
US 2nd Quarter GDP
 
Page 3investment created by the sub-prime mortgage crisis - as may be seen from 
.Thedecline in US residential fixed investment, again in 2005 dollars, was $172 billion whereasthe decline in non-residential fixed investment was $241 billion.
Fixed investment and inventories
A further feature indicating the specific pattern of US recovery is the financing of grossdomestic investment - i.e. fixed investment plus inventory accumulation. Although, as notedabove, US fixed investment remains severely depressed, nevertheless for the first time forfour years there was a small upturn, of 0.5%, in the percentage of US GDP devoted to fixedinvestment in the 2nd quarter - fixed investment rose to 15.6% of GDP from its low of 15.1%in the 1st quarter of 2010. This reflected a stabilisation of the share of residential investmentin GDP and a slight increase in the share of non-residential investment
 –
see 
. However it is clear that the majority of the saving necessary to finance the small upturn inoverall gross investment has come from a worsening of the US trade balance - i.e. fromforeign borrowing. Since the low point of the recession, in the 2nd quarter of 2009, US fixedinvestment and inventory accumulation has increased its share of GDP by 1.6% - rising from14.5% of GDP to 16.1%. However this increase was entirely due to inventory accumulation -the percentage of US GDP devoted to private sector inventory accumulation rose by 1.9%,from -0.6% of GDP to +1.3%. US fixed investment declined by 0.2% of GDP in the sameperiod - from 15.8% of GDP to 15.6% of GDP.Precisely quantifying the contribution of borrowing abroad to the financing of inventoryaccumulation is not possible until the US balance of payments figures for the 2nd quarter arepublished in September. However US balance of payments figures are dominated by the USbalance of trade. The US trade deficit has been steadily widening since the depth of theFigure 3

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