Q2, Positive Growth Expected

Economic growth can be analyzed from several vantage points, such as the growth rates of the various GDP components or their direct contributions to growth. In this short piece we intend to focus primarily at component contributions to real GDP for the second quarter (Q2), fiscal ’08.

This is partly because the trends despite each measure exhibiting advantages, and certain weaknesses as well, more importantly provide significant clues about the outlook for Q2/GDP ’08, which we think will post growth of about 2% annual rate.

Based on most recent economic data, the real GDP growth is already accelerating out of the sluggishness we experienced in the last quarter of fiscal ’07 and the first quarter of fiscal ’08. True and quite objective analytically is the justified pretension on the part of many, regarding the current state of the economy and its troubling spots, such as the continued problems in the credit markets and the securitization business causing disarray in the banking system. However, it is rather evident that while this is still very much a financial crisis, it is not yet a full-fledged economic one ; a distinction that we believe is worth emphasizing.

In relation to economic data: in the past three months, core retail sales have increased at a 10.2% annual rate, exports continue to surge, currently pacing at almost 20% rate, and the construction of business buildings is up at a 16.7% rate. Meanwhile, GDP components such as Personal Consumption, based on our estimates will likely fluctuate between 1.2% – 1.3% projected contribution to total GDP growth. Followed by Net Exports at 0.8%, Business Investment – Structures 0.4%, Residential (housing) projected negative -1.0%, Government 0.4% and Inventories 0.1%. As a result, GDP growth to a 2% annual rate. Although economic estimates and projections have no specific and clear-cut ways of forecasting outcomes, they can certainly shed light on how components as a whole in this case, will contribute to aggregate productivity.

Worth pointing out, and as we have noted in past articles is that – given the continued good levels of consumer spending which is the foundation of economic growth accounting for over 70 percent of the U.S. gross domestic product, booming exports and healthy corporate balance sheets, it is important to remember that economic growth, though still weak – is considerably stronger than widely recognized. Inflation trends on the other hand, are highly uncertain and likely to worsen in the quarters ahead, but weak demand will keep core rates steady.

We still remain optimistic in our believe that there will not be a single quarter of receding GDP this business cycle and we also expect continued acceleration of real GDP growth into the second half of fiscal ’08.

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