Friday, July 30, 2004
The GDP numbers are not as bad as the headline 3.0% number will make it seem. The first quarter numbers, which were revised to down to 3.9% from 4.4% last month, have now been revised back up to 4.5%. As I have said, predictions about the economy are usually done using models of the level of GDP -- you report the growth rate as an after-the-fact calculation. A revision up of 0.6% for the first quarter removes 0.6% from the second quarter forecast, so 30% of my crow is taken from my plate.
Another factor in the lower number -- which in retrospect I should eat crow for -- was the decline in business inventories. The final number for inventory growth for the first quarter was much sharper than I had been led to believe. These trends typically reverse, so I really should have shaved some points from the mechanical forecast. Inventory growth in the second quarter was roughly flat, which took about 1% off the GDP figure that I should have realized. Half a crow stays.
Many people are going to make a big deal of declining consumption, but I don't think it's as bad as it will be portrayed. Final sales of goods and services have been growing at the 3-3.5% range for three quarters now, and the new figure is only slightly below that at 2.8%. Disposable personal income is still rising around 3%. There's a little less consumption here than I expected, but not too much. What you do with the last 20% of the crow depends on how much you want to punish your local forecaster.
And as I mentioned a couple of days ago, the consumer confidence figures are looking much better. Today both the University of Michigan consumer confidence index and the Chicago purchasing managers index moved up smartly. There's enough new income in the economy and enough investment in the private sector -- which held up very well in the second quarter, on that at least I was correct! -- that we could rebound strongly in the third quarter. I had thought there would be at some point rotation of the expansion from consumers to businesses, and it appears we're now having (or just had) the quarter where that rotation occurs. Of course, those numbers will be reported just before the election, and perhaps not do much to persuade the electorate. That's why this number was so important. No matter what happens from here, the Kerry campaign is going to play this 3.0 as evidence the economy is slowing so that they can replay the "help is on the way" line that the press picked up from the acceptance speech last night.
But the optimism expressed in those two polls and from some work I'm doing locally would suggest that nobody feels they need that help. I'm in the middle of writing a new issue of our St. Cloud Quarterly Business Report and have been looking at data for Central Minnesota for the last couple of weeks. The data I have looked at suggest to me that in this area, the economy has gone pretty much sideways after a robust first quarter. We have not lost any ground but neither have we gained more steam. Businesspeople I talk to up here seem to remain very optimistic about business activity for the second half of the year, be it people in construction or in services. The only place that seems to be troubled are the manufacturing sectors of the local economy.
As I mentioned back in that first post on the 9th, the diffusion data seem to be saying many areas of manufacturing are up. But that doesn't seem to be happening in St. Cloud. In the state of Minnesota, over the last ten years manufacturing employment growth has been 0.2% per year versus 1.9% in services. Those numbers for St. Cloud are 2.7% and 2.3%, however. (We collect this data from DEED, if you're interested in rooting around for this stuff.) So while the economy in general should be growing, we have much of our growth in a declining part of the economy. That sideways movement occured in the second quarter shouldn't really surprise us at all.
GDP growth of 3% is likely to mean, if the number stays in place, that the unemployment rate will not improve much over the next month or two. As the graph above show, the movement in jobs is still taking us back statewide to about where we were for growth at the beginning of the Bush administration. Therefore, I am still fairly optimistic that the weakness in the current GDP numbers are simply a pause before the next step up.