The good news from today’s interim estimate of second-quarter GDP from the Bureau of Economic Analysis is … well, there isn’t any good news. The less-bad news? The Q2 contraction reported in the advance estimate a month ago came down from an annualized rate of -0.9% to -0.6%. And the only reason it contracted less than the advance estimate showed was because the weird trade imbalance that shielded the more-likely -2.3% contraction was weirder than first reported:
Real GDP decreased less in the second quarter than in the first quarter, decreasing 0.6 percent after decreasing 1.6 percent. The smaller decrease reflected an upturn in exports and a smaller decrease in federal government spending that were partly offset by a larger decline in private inventory investment, a slowdown in consumer spending, and downturns in nonresidential fixed investment and residential fixed investment. Imports decelerated.
Remember what I pointed out last month?
The good news — and there’s not a lot of it — is that the unusually large trade imbalance in Q1 that drove the negative overall result has been corrected. The bad news is that Q2 also has a weird imbalance in trade, this time favoring exports (+18.0%, with imports only up 3.1%). That may have artificially created a more positive component to GDP, meaning that Q2 may actually have been worse than it appears. The WSJ pegs the difference as 1.43 points to GDP, which means that a balanced trade quarter (and we usually run negative) would have made this a -2.3% GDP report.
The new estimate has exports up 17.6% rather than 18%, but imports only went up 2.8% rather than 3.1%. The net imbalance still adds massively to GDP, as the WSJ pointed out last month. Without that hugely and strangely positive trade imbalance, the likely GDP rating for Q2 would still likely have been around -2.2%.
The other metrics underlying the results didn’t change significantly from the advance estimate. Real consumption looks slightly better at a 1.5% increase, but domestic investment is still off by almost an identical -13.2%. Gross domestic purchases came in at -1.9%, slightly better than the advance estimate of -2.2%, but final sales to domestic purchasers did move positive to 1.3% rather than -0.2% in the advance estimate.
So much for the good news. Here’s the bad news — buying power eroded slightly more in Q2 than the advance estimate reported. Personal savings also dropped more, and even nominal income fell off the advance estimate:
Current-dollar personal income increased $353.1 billion in the second quarter, a downward revision of $0.7 billion from the previous estimate. The increase primarily reflected increases in compensation (led by private wages and salaries), proprietors’ income (both nonfarm and farm), personal income receipts on assets, and rental income of persons (table 8).
Disposable personal income increased $287.0 billion, or 6.5 percent, in the second quarter, a downward revision of $4.4 billion from the previous estimate. Real disposable personal income decreased 0.6 percent, a downward revision of 0.1 percentage point.
Personal saving was $945.0 billion in the second quarter, a downward revision of $23.4 billion from the previous estimate. The personal saving rate—personal saving as a percentage of disposable personal income—was 5.1 percent in the second quarter, a downward revision of 0.1 percentage point.
Emphasis mine. “Real” measures indicate inflation adjustment. “Current-dollar” means no inflation adjustment. This shows that not only did the economy contract significantly in Q2, buying power also eroded at the same time. This confirms that real disposable personal income has declined for five straight quarters, a measure that compounds because it is comparative. The 0.6% decline in Q2 results from a comparison to Q1, which declined 7.8% from 2021Q4, which declined -4.5% from 2021Q3, etc. A -0.6% decline in Q2 is not an improvement off a benchmark level in relation to Q1, in other words — it’s how much worse real disposable personal income got over the past quarter from the Q1 level.
That may or may not be a technical recession, but it’s at the very least stagflation. Joe Biden and Democrats may have given themselves a few weeks of political space on inflation with their “Inflation Reduction Act,” but they’d better pray that the inflation reports in September and October don’t come in as hot as those preceding them. And let’s not forget that we’ll get the advance Q3 GDP report less than two weeks before Election Day, too. When the trade imbalance rights itself in Q3, look out.