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GDP growth in 2Q08

Fri, Jul 25 2008, 07:24 GMT
by Marcial Nava, Alejandro Neut

BBVA Bancomer

• • Boosted by tax rebates and monetary policy, consumer spending proved resilient in 2Q08

• • Non-residential investment was solid, while residential investment declined 

• • Risks are tilted to the downside, we expect GDP to weaken in 2H08
  

Economic activity in the second quarter

According to our estimates, the U.S. economy proved resilient in the second quarter. We expect 0.93% real GDP growth in 2Q08 from 0.96% in 1Q08. This is equivalent to 1.8% year-over-year growth rate in 2Q08 from 2.5% in 1Q08.

Our estimates suggest that personal consumption expenditures’ (PCE) growth accelerated to 1.5% in 2Q08 from 1.1% in 1Q08. Tax rebates and lower interest rates may have boosted consumers’ spending despite rising energy costs and job losses. The fiscal stimulus seemed to have had a positive impact on demand for non-durable goods and services; however, it wasn’t enough to revive durable goods purchases. For instance, auto sales fell 7.2% in the quarter, the sharpest decline since December 2005.

We expect a moderation of non-residential investment (NRI) to a 2.0% growth rate in 2Q08 from a 4.2% in 1Q08. Real capital goods orders posted strong gains in the first quarter, anticipating a sustained expansion of NRI in the next quarter. However, on a year-over-year basis, we expect NRI to have decelerated to a 5.3% growth rate from a 7.5% rate in the previous quarter.

In 2Q08, residential investment (RI) most likely subtracted to GDP growth as the housing adjustment continued. Housing starts declined 3.5% from the previous quarter, equivalent to a 30.4% reduction from the level observed a year earlier. Residential investment probably declined another 20.9%.

Foreign trade dynamics continued to favor GDP growth. We expect a 3.4% rise in exports from the 5.5% rise in 1Q08. This rate would have been boosted by sustained growth overseas. Meanwhile, we expect a further 3.4% reduction in imports, from the 0.7% reduction in 1Q08. Dollar depreciation and a weaker demand would be the main drivers for such outcome.

Further weakness going forward

Factors behind GDP resiliency in 2Q07 are merely transitory. The effect of tax rebates is likely to fade away amid rising energy prices and slower income growth, thus PCE could decelerate significantly in the coming quarters. Moreover, ongoing financial distress has added significant pressures to our main scenario. Non-residential investment is likely to be impaired by rising costs of funding, while residential investment will continue subtracting to GDP growth. On the positive side however, net exports will be supportive, though exports could moderate in the next few quarters as economic growth abroad soften.

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Published on  Fri, Jul 25 2008, 07:32 GMT