Another look at US second quarter GDP and durable goods orders

Last week saw two major positive surprises from economic reports in the United States on gross domestic product and durable goods orders. However, close reading of the numbers suggest that there are downsides to the reports.

The GDP report on 28 August showed that economic growth accelerated to an annual rate of 3.3 percent in the second quarter, much higher than the advance estimate of 1.9 percent and the first quarter growth rate of 0.9 percent. The increase was also larger than the 2.7 percent gain expected by economists surveyed by Bloomberg.

An improvement in the trade deficit was the main reason for the acceleration in GDP growth. Real exports of goods and services increased 13.2 percent in the second quarter compared with an increase of 5.1 percent in the first, while real imports of goods and services decreased 7.6 percent compared with a decrease of 0.8 percent.

The strong growth is widely seen by economists as unsustainable though. The rest of the world is already slowing -- Japanese GDP fell 0.6 percent in the second quarter from the first, eurozone GDP fell 0.2 percent and GDP in the United Kingdom was unchanged. A global economic slowdown is likely to slow US export growth.

In any case, the acceleration in GDP growth may not be a proper reflection of what is happening to living standards in the US. Menzie Chinn at Econbrowser points out that the growth rates of the GDP and gross domestic purchases deflators have diverged. The price index for GDP increased 1.2 percent in the second quarter, down from a 2.6 percent rate in the first. The price index for gross domestic purchases, however, increased 4.2 percent in the second quarter, higher than the 3.5 percent rate of increase in the first.

As Chinn says, "the prices for what we produce have diverged in a significant way from the prices for what we consume". So the US may be producing more but it may not be getting richer.

The durable goods orders report on 27 August was also a positive surprise, showing a 1.3 percent increase in orders, the third consecutive monthly increase. Economists surveyed by Bloomberg had projected orders would be unchanged. June orders were revised to show a 1.3 percent increase from the 0.8 percent previously reported.

Like GDP though, the better-than-expected increase in durable goods orders has been widely attributed to strong exports -- plus some boost from the economic stimulus package -- and considered unsustainable by most economists.

Unfortunately, prices also played a large part in the increase. Producer prices have surged over the past few months. The producer price index for durable manufactured goods jumped 5.4 percent in the 12 months to July. The accompanying chart shows that real durable goods orders -- deflated using this index -- shows a declining trend similar to that exhibited by the Institute for Supply Management's manufacturing new orders index.

So the US economy is better than economists had expected but remains in a rough spot.