Fisher Investments Editorial Staff
US Economy, GDP

An Import-Led Recovery

By, 08/02/2010

Story Highlights:

  • US GDP for Q2 2010 was released Friday morning, showing the fourth consecutive quarter of growth.
  • The growth rate was slightly less than estimated, and slowed from Q1.
  • Revisions to aged data from the recent contraction were also released to much fanfare.
  • Expansions aren't defined by continuous increases in growth rates each successive quarter.
  • With more than ample fuel, it looks likely US growth continues ahead.


Early Friday morning, the advance estimate of US GDP for Q2 2010 was released—showing the fourth consecutive quarter of growth! This time expanding at a 2.4% annualized rate—a figure likely subject to multiple revisions down the road. But instead of cheering our expanding economy, most headlines bemoaned 2.4% being slightly lower than consensus expectations of 2.6% and slower than  Q1 (which was revised a whopping 1% higher—3.7%).

While the GDP report is inherently a recent history lesson providing limited insight into the future, there are many items speaking to the nature of the ongoing expansion. First, gross private domestic investment was strong—reflecting big contributions from the spending of cash-rich corporations and a rather surprising increase in residential investment (though this data is likely skewed by recent tax credits). State and local government expenditures were also positive—for the first time since Q4 2008. And while slightly lower than estimated, personal consumption increased for the fourth consecutive quarter—despite high unemployment rates frequently cited (incorrectly) as a major headwind to spending.

The biggest single drag on the growth rate—lowering it by a full 4%—was imports. The methodology for calculating GDP marks imports as a negative—subtracting them from exports. The resulting "net exports" figure is frequently negative—technically a drag on GDP growth—since we tend to import more than we export. While this makes sense as GDP is designed to measure domestic output, it can also understate the actual health of the economy. Is an increase in US imports really negative (beyond GDP math)? Increasing US imports likely shows strong consumer and business demand and increasing global trade. To wit, exports grew by a healthy 10.3%, but imports grew an astounding 28.8% annualized—the fastest quarterly growth since 1984. The pesky stronger dollar likely played a role by making foreign goods cheaper. Some analyses even pointed to seasonal adjustments petroleum imports, boosting the import figures in another wonky calculation. Perhaps most importantly, it's critical to look globally first and country-specific second, and increasing trade is good for the global economy. In recent quarters, myriad signs from all over the world show an encouraging sharp upturn in global trade.

Friday's US GDP release also contained revisions of even older data, sparking an archaeological dig into the 2007-2009 contraction. The data showed it was slightly deeper than previously thought with growth for most quarters during the recession revised lower. These revisions garnered a lot of attention—but they're mostly fodder for history books now.

A more fruitful use of history is putting Q2's slower growth rate into perspective. Typically, expansion isn't a smooth slope higher with each successive quarter's growth exceeding the prior. Economic growth rates are often erratic without foretelling recession clouds approaching—such as multiple occurrences in the 1960s, 1980s, and 1990s. According to Bureau of Economic Analysis data since 1950, it's hard to pinpoint any US economic expansion where growth rates consistently increased throughout.

In separate reports, Friday's Chicago Purchasing Managers' Index and Milwaukee National Association of Purchasing Managers survey were expected to fall, but rose. With corporations continuing to carry huge cash balances, resurgent debt markets, strong global trade, a much healthier global banking system, massively increased corporate profits, rapidly expanding developing economies, and accommodative policies worldwide, there's more than ample fuel for growth to continue moving forward—and quite possibly reaccelerate.


*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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