GDP revision for Q2 suggests economy has turned the corner

U.S. GDP fell just 0.7 percent in Q2, a smaller decline than the previous 1.0 percent estimate, the U.S. Commerce Department announced Wednesday. The revised report lends credence to the argument that the recovery is underway and the economy is very close to expanding.

A Bloomberg News survey had expected Q2 GDP (revised) to decline 1.2 percent. The U.S. economy contracted 6.4 percent in Q1. In 2008, the world's largest economy grew a scant 1.1 percent, well below capacity.
In current dollar terms, U.S. GDP fell 0.8 percent or by $26.8 billion to an annual rate of $14.15 trillion.

The Commerce Department said the smaller, revised Q2 contraction stemmed primarily from stronger business spending and more exports. Exports are getting a mild boost from the weaker dollar, which makes U.S. goods less expensive for foreign buyers, all other factors being equal.

Meanwhile, core consumer prices -- an inflation barometer closely monitored by the U.S. Federal Reserve -- increased at a two percent annual rate in Q2. Core consumer prices have now risen just 1.6 percent in the past 12 months, within the Fed's 'comfort zone' for inflation.

Still, despite the better-than-expected Q2 GDP news, the nation's pronounced recession has taken a toll. Over the past 12 months the U.S. economy has contracted at a 3.8 percent pace, its most severe contraction since the end of World War II.

While some have credited the Obama administration's $786 billion fiscal stimulus package with putting a floor under the economy, others disagree. The Heritage Foundation argues that fiscal stimulus spending has failed in that it has not prevented job losses nor pulled the U.S. economy out of recession. Heritage is also calling for the end of TARP spending, saying it "has veered wildly off course and become an unrestrained government slush fund."

In Q2, federal government spending increased 11.4 percent, boosted higher by the fiscal stimulus package. Overall government spending, which includes local, state and federal expenditures, increased 6.7 percent. Corporate profits increased 3.7 percent, business fixed investment declined 9.6 percent, and real consumer spending dipped 0.9 percent.

Analysis: A modest revision in Q2 U.S. GDP, but one business executives and economists will take. Further, U.S. stock markets will likely interpreted the lower-than-expected 0.7 percent contraction favorably, as it keeps the recovery narrative in place. The U.S. economy still isn't growing, job losses are still occurring (and will likely continue for three to six more months), but there is a light at the end of the tunnel -- namely, GDP growth.

A pessimist could look at the Q2 GDP report and emphasis lagging consumer spending. However, an optimist would look to the large decline in business inventories as a clue pointing to better days ahead. Any sign of increasing demand will prompt businesses to increase production -- including hiring at least some new employees -- to restock warehouses in order to avoid being short of products during a recovery. That inventory rebuild, plus likely stronger-than-expected export demand, should finally turn GDP positive in Q3/Q4 -- and that would be a welcome sight.
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