Fisher Investments Editorial Staff
US Economy

Wild Wyoming and Washington

By, 08/30/2010

Story Highlights:

  • Revised Q2 2010 US GDP growth was released Friday and was better than expected.
  • Despite headlines, the last four quarters' growth isn't as weak as many believe.
  • The headline number doesn't fully reflect economic health.
  • Central bankers met in Jackson, Wyoming and cited continued recovery looking forward.


Friday morning, the Bureau of Economic Analysis (BEA) revised real Q2 2010 GDP growth downward from 2.4% to 1.6%, exceeding consensus analyst estimates of 1.4%. Stocks surged on the news of the better-than-expected report. Still, some interpreted this revised recent history as a sign of economic malaise—seeing this growth as weak, or sign of a fragile US recovery.

Before extrapolating a slower growth rate forward, consider there have been zero US economic expansions in which GDP growth accelerated each successive quarter (at least according to the BEA). Accelerations and decelerations are normal. And while it's true there have been stronger recoveries than the current one (in GDP terms), there have also been weaker. Just look at the first four quarters' growth in the last three economic expansions:

  • Q2 1991-Q1 1992: 2.7%, 1.7%, 1.6%, 4.5%.
  • Q4 2001-Q3 2002: 1.4%, 3.5%, 2.1%, 2.0%.
  • Q3 2009-Q2 2010: 1.6%, 5.0%, 3.7%, 1.6%.[i]

So while Q2 2010 growth (following revision) is the lowest of these fourth quarter rates, the present recovery is not the weakest in full. The first three quarters of the early ‘90s expansion were weaker than the present—clearly not indicative of weak expansion or recession ahead then.

Downward revision to Q2 headline growth was primarily due to net exports (exports less imports) being revised lower, reflecting stronger than previously reported demand for foreign goods. Net exports alone subtracted 4.5% from Q2 growth. But GDP isn't always a direct reflection of economic health—after all, plenty of US businesses sell imported goods. Increased sales of imports necessitating restocking is a plus for them, but a minus for GDP—and a boon to the exporting country's GDP. In Q2, real gross domestic purchases, a measure of all goods and services purchased by US residents irrespective of country of production, increased 4.9%—an acceleration from 3.9% Q1 growth. So why did revised GDP exceed estimates? Business investment in technology was revised up to its best quarter since 1983. And consumer spending was revised up from 1.6% growth to 2.0%—an acceleration from Q1's 1.9% growth. Looking back at Q2, while the headline number's growth did slow, beneath the surface the report shows ongoing healthy demand.

Meanwhile, global central bankers met in Jackson, Wyoming. In wide-ranging remarks, Federal Reserve Chairman Ben Bernanke said uncertainties exist (don't they always?), but the most likely course is continued economic expansion. He also addressed ongoing deflation fears, saying, "Falling into deflation is not a significant risk for the United States at this time." Well said, Ben. As to interest rates and quantitative easing, the only hiking discussed in Jackson Hole was in Grand Teton National Park. "Exceptionally accommodative monetary policy" remains the Fed's stance, though they said nothing of needing to become more accommodative now. Perhaps the Fed's economic view forward isn't as stunning as the Grand Tetons (a ridiculously high standard)—but still continued growth is on the vista.

Hindsight from the Washington Monument's tip combined with foresight from Mt. Moran's summit indicates a healthy economy that likely hasn't peaked. Add this to global economic data (like UK Q2 GDP revised higher today), booming global trade, increasing corporate profits and revenues, announced mergers, and easy financing in corporate debt markets, and this recovery isn't looking so sluggish. Lagging statistics like unemployment or sore spots like housing may make some folks feel like the US is still in recession, but data doesn't speak to it. Unfortunately, there's no Taiwanese factory manufacturing economic jubilance. If there were, Americans would likely have imported and consumed a lot of it in Q2! (No word from the BEA on how imported glee would impact GDP).

[i] Source: Bureau of Economic Analysis, "Percent Change From Preceding Period in Real Gross Domestic Product."


*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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