Ugh: Q2 GDP Growth Revised Downward to 1.0 Percent

Guy Benson

8/26/2011 10:13:00 AM - Guy Benson

The US economy's 2011 Q2 growth stat was anemic before the Commerce Department revised it to a paltry...1.0 percent:


The U.S. economy grew much slower than previously thought in the second quarter as business inventories and exports were less robust, a government report showed on Friday, although consumer spending was revised up. Gross domestic product growth rose at annual rate of 1.0 percent the Commerce Department said, a downward revision of its prior estimate of 1.3 percent. It also said after-tax corporate profits rose at the fastest pace in a year.

Economists had expected output growth to be revised down to 1.1 percent. In the first quarter, the economy advanced just 0.4 percent. The government's second GDP estimate for the quarter confirmed growth almost stalled in the first six months of this year.  The United States is on a recession watch after a massive sell-off in the stock market knocked down consumer and business sentiment. The plunge in share prices followed Standard & Poor's decision to strip the nation of its top notch AAA credit rating and a spreading sovereign debt crisis in Europe.


Ed Morrissey identifies the primary causes of the downward revision:
 

The change mainly came from inventories, which the previous estimate overshot.  Real final sales of domestic goods — GDP less inventory adjustments — remained at 1.2%, making it a rare quarter in the last two years where this measure outstripped the topline GDP growth rate.  Most of the GDP reports have been amped up by inventory expansions.  Another bright spot is a revision in consumer spending, which increased 0.4% rather than the initial 0.1% estimate.  However, exports got downgraded to a 3.1% increase from an initial estimate of 6.0%.


So much for "summer of recovery," redux.  Speaking of recovery, Stephen Moore has a must-read piece in today's Wall Streeet Journal contrasting the disparate responses of the Obama and Reagan administrations to deep, inherited recessions:


The two presidents have a lot in common. Both inherited an American economy in collapse. And both applied daring, expensive remedies. Mr. Reagan passed the biggest tax cut ever, combined with an agenda of deregulation, monetary restraint and spending controls. Mr. Obama, of course, has given us a $1 trillion spending stimulus.

By the end of the summer of Reagan's third year in office, the economy was soaring. The GDP growth rate was 5% and racing toward 7%, even 8% growth. In 1983 and '84 output was growing so fast the biggest worry was that the economy would "overheat." In the summer of 2011 we have an economy limping along at barely 1% growth and by some indications headed toward a "double-dip" recession. By the end of Reagan's first term, it was Morning in America. Today there is gloomy talk of America in its twilight.  My purpose here is not more Reagan idolatry, but to point out an incontrovertible truth: One program for recovery worked, and the other hasn't.


After ridiculing Keynesian critiques of Reagan's supply-side approach for their inaccurate predictions, Moore addresses the Left's evolving explanations for why Obama's policies have failed:


The left has now embraced a new theory to explain why the Obama spending hasn't worked. The answer is contained in the book "This Time Is Different," by economists Carmen Reinhart and Kenneth Rogoff. Published in 2009, the book examines centuries of recessions and depressions world-wide. The authors conclude that it takes nations much longer—six years or more—to recover from financial crises and the popping of asset bubbles than from typical recessions.

In any case, what Reagan inherited was arguably a more severe financial crisis than what was dropped in Mr. Obama's lap. You don't believe it? From 1967 to 1982 stocks lost two-thirds of their value relative to inflation, according to a new report from Laffer Associates. That mass liquidation of wealth was a first-rate financial calamity. And tell me that 20% mortgage interest rates, as we saw in the 1970s, aren't indicative of a monetary-policy meltdown. There is something that is genuinely different this time. It isn't the nature of the crisis Mr. Obama inherited, but the nature of his policy prescriptions.
 

Read the whole thing for an excellent Friday morning education.