GDP figures due

It's now 11.47GMT, US GDP figures are out at 12.30GMT. What are my thoughts?

Well, the soon-to-be-revealed release is not a "major" release, but an update. The last "major" release was on July 31, which I blogged about extensively here.

Let me just summarise quickly what happened 1 month ago (apart from the fact that I got the prediction wrong):

Q4 2007 -0.2%
Q1 2008 +0.9%
Q2 2008 +1.9%

Analysts predicted +2.3% Q2 2008, so the result was lower than expected.

These analysts predict the following revisions to the report that will be out within the hour:

Q1 2008 +0.9%
Q2 2008 +2.7% (revised upwards from +1.9% originally)

Well, since I'm new to the game, here are my predictions:

Q4 2007: -0.2% to -0.4% (no change or small revision downwards)
Q1 2008: +0.4% to -0.2% (substantial revision downwards)
Q2 2008: +1.5% to +1.0% (substantial revision downwards)

I use as the basis for this analysis the sudden reduction in M3 during Q2 2008 that I posted about here.

Of course, if Q1 growth was negative then the US will be, according to some theories, in a technical recession, so long as Q4 2007 figures remain negative too.

Now, the last time I predicted GDP rates I got it very wrong, so lets see how much egg I get on my face this time around.

The page to check at 12.30GMT is here. I will publish a direct link to the official release when I update.

Update 12.34GMT
Q4 2007 -0.2% (no change)
Q1 2008 +0.9% (no change)
Q2 2008 +3.3% (big revision upwards)

Direct link to official release (pdf, 628.2 kb)

I would hazard a guess that Q2 2008 GDP has been driven somewhat by the economic stimulus caused by Bernanke's interest rates cuts from Q3 2007 to Q1 2008. The analysts' argument was that exports seem to be driving some growth as well (due to the lower US dollar).

Update 12.39GMT

Bloomberg:
U.S. stock futures climbed after better-than-estimated economic growth bolstered expectations the economy will recover from the collapse of the subprime mortgage market.

American International Group Inc., Wal-Mart Stores Inc. and Citigroup Inc. led gains in Dow Jones Industrial Average stocks trading in Europe after the Commerce Department said gross domestic product expanded at a 3.3 percent annual rate in the second quarter, up from a 1.9 percent estimate made last month.

Update 13.11GMT

Q2 2008 percent change from the previous quarter:

Personal consumption +1.7%
Exports +13.2%
Imports -7.6%
Federal Government spending +6.8%
State and Local Government spending +2.2%
Defense +7.4%
Gross private domestic investment -12.0%
Disposable personal income (current dollar measure) +16.1%

It's that last one, disposable personal income, that has me worried. The 16.1% increase is the highest it has been since at least 2005 (according to the official release). In Q1 2008 it was +2.9% and the figures for the previous years are 2007: +5.5%, 2006: +6.4%, 2005: +4.4%. An increase of such magnitude is disturbing.

Although I'm not absolutely certain what the technical definition of "Disposable personal income" is and why it has two measures in the official release (the one I quote is labelled under "current dollar measure"), I would guess that it has something to with cash in people's pockets ready to spend on things, rather than money spent on regular expenses. This means that in Q2 2008 people had a sudden influx of money at the same time as an increase in exports, a double whammy of good news for the economy.

But the reason why it has me worried is that such an increase in disposable income is probably due to the stimulus checks mailed out during Q2 to boost the economy that were approved by Congress and Bush. Such a massive increase cannot be repeated in Q3 2008 unless congress decides to throw more money around before the end of September. In the short term this means that the boost will be limited to Q2, which means that Q3 will have less pleasant GDP figures. In the long term it means, simply, that the government will eventually have to pay it back.

Both fiscal and monetary policy has long and short term effects. A fiscal stimulus like the one experienced in Q2 2008 acts to boost GDP in that quarter, but will also have a contractionary effect later on, say in Q1 2009 onwards.

As for its effects on unemployment, I would probably say that August and September figures are likely to hover between 5.6 - 5.8%. Inflation will continue on its merry way in that period also (5%+ for both months).