It’s official: the economic contraction slowed dramatically in the second quarter. By that standard, the government can claim a victory. But now comes the hard part, and progress won’t come easily or quickly.
For the moment, however, there’s reason to cheer. The annual real change in GDP in this year’s second quarter was a relatively mild fall of 1.0%, the Bureau of Economic Analysis reports today. That’s a massively improved number from the first quarter’s huge 6.4% tumble.
The sharp slowdown in the rate of contraction isn’t necessarily surprising. As we’ve been discussing for months, a number of economic clues have been suggesting that the recession may be coming to a technical end. At the same time, we’ve also been warning that the official end of the recession—as defined by NBER—isn’t likely to lead to a rebound of any strength any time soon. Instead, we’re looking at an extended period of flat to perhaps modestly negative GDP reports between the technical end of the recession and the start of the recovery. In that sense, the business cycle is different this time, and the risk of a double-dip recession is therefore higher than normal as well.
Today’s GDP report suggests no less. Indeed, looking behind the big-picture slowdown in the economic contraction reveals quite a few reasons to wonder about what’s coming in the quarters ahead.
Consider, for instance, that consumer spending resumed its decline in Q2 after rebounding a bit in the first three months of this year. Recall that in the second half of last year, personal consumption expenditures went into a tailspin amid the dire news of financial crisis and the widespread expectation that the economy was headed into the worst bout of decline since the Great Depression. Predictably, consumers responded by sharply curtailing spending, delivering two straight quarters of 3%-plus declines in personal consumption expenditures in the second half of 2008.
The trend was broken in Q1 of this year, when spending rebounded a bit, posting a 0.6% rise. But now we learn that consumer spending overall fell again in the three months through June, dropping 1.2%. What’s more, the fall was across the board, in durable and nondurable goods. Only services managed to eke out a tiny but statistically insignificant gain.
Nonetheless, our forecast that consumer spending is headed for an unusual period of sluggish growth, if any, seems to be coming to pass. In an economy that draws more than two-thirds of GDP from Joe Sixpack’s trips to the mall, the trend bodes ill for expecting a dramatic economic rebound anytime soon. Indeed, Joe’s tapped out, struggling with various debts and the loss of job opportunities that are essential for repairing the household balance sheet.
Meanwhile, there’s more bad news in today’s GDP update on the private domestic investment front. This is a measure of the business sector’s willingness to invest in new plants and equipment and so to some extent this is a leading indicator. Alas, the fact that private domestic investment fell sharply again in Q2—by more than 20%–suggests that corporate America continues to take a wait-and-see attitude. Unfortunately, this cautious behavior has been running continuously for seven straight quarters. The last time private domestic investment rose was Q3 2007.
So what accounts for the slowdown in GDP’s Q2 decline? An acceleration in government spending. Government consumption expenditures rose by a hefty 5.6% during the April-June quarter, the highest rate in many a moon. The government’s intervention has stemmed the tide of what would otherwise been an even deeper contraction. But moving beyond government handouts isn’t going to be easy in the foreseeable future.
The apocalypse has been avoided, but the tougher challenge has only just begun.