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GDP Growth in 2Q08: revision of forecasts

Fri, Aug 1 2008, 15:57 GMT
by Marcial Nava, Alejandro Neut

BBVA Bancomer

• • PCE rebounded favored by tax rebates, but could decelerate significantly once the effect of the fiscal stimulus vanishes 

• • Residential investment declined less than expected; however, the adjustment will continue in coming quarters 

• • We have revised our forecast up for 2008 and down for 2009
  

Second quarter GDP growth came out above our expectations at 1.9%. On a year-over-year basis, growth was 1.8% from 2.5% in 1Q08. Growth in 2Q primarily reflected positive contributions from: private consumer expenditures (PCE), net exports, government spending and non-residential investment. These were partially offset by a (less than expected) negative contribution from residential investment and also by private inventories. In addition, BEA revised GDP growth over the last 13 quarters, showing a 0.2% reduction in 4Q07.

Boosted by tax rebates, PCE growth rebounded to 1.5% from 0.9% in 1Q08. The fiscal stimulus had a great impact on demand for non-durable goods, which climbed 4% from -0.4% in 1Q. However, durable goods’ purchases declined 3% following a 4.3% lost in the previous quarter. Spending on private services moderated to 1.1% from 2.4% in the previous quarter.

Surprisingly, residential investment fell at a slower rate than expected (- 15.6%), subtracting 0.6 pp. to overall GDP growth, half the average of the past three quarters. Though this is a positive sign, we prefer to be cautious since leading indicators still point to a major adjustment going forward. Consequently, residential investment could be revised down.

Non-residential investment (NRI) expanded 2.3% from 2.4% in 1Q08. The increase was led by a 14.3% gain in structures, which was due to a strong growth in manufacturing and mining. Commercial and health also rebounded though not enough to compensate for a decline in the previous quarter. Private inventories declined by more than we expected, subtracting almost 2 pp. to overall growth.

Favored by a solid economic expansion abroad, net exports added 2.4 pp to GDP growth, the largest contribution since 2Q08. Total exports increased 9.2%, boosted by 11.9% growth in merchandise. Meanwhile imports declined - 6.6%, the lowest since 3Q01, both imports of goods and services fell sharply in the second quarter, -6.3% and -8.5% respectively. Government spending jumped 3.4% due to a significant increase in spending on national defense. Government outlays at the state and local level declined 0.3%, probably due to lower income coming from the meltdown in the housing sector.

Despite the accelerating trend in the first and second quarters of 2008, the economy is heading south in what is now a cyclical downturn. Furthermore, it may turn into a severe slump if the triple shock currently affecting the economy (housing, financial sector problems, and high commodity prices) drags on. As a result, we revised down our forecast in 2009.

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Published on  Fri, Aug 1 2008, 16:00 GMT