GDP growth below expectations as employment costs rise

Real GDP rose by 2.4% in the second quarter, slightly below expectations. The increase in GDP was driven by robust business equipment spending, a pickup in inventory investment, and a rebound in structures spending. Real GDP has risen by 3.2% over the last four quarters. First-quarter real GDP was revised significantly higher, but the four-quarter trend in real GDP through the first quarter was unrevised. The personal savings rate was revised sharply higher.

Total employment costs rose 0.5% in the March to June quarter, which was in line with forecasts. Over the last 12 months, the ECI has risen 1.8% (up from 1.7% in the first quarter).


BOTTOM LINE

Growth slowed more than expected in the second quarter but only because first-quarter growth was revised significantly higher! The year-over-year picture for real GDP growth, at 3.2%, was exactly what we projected despite all the revisions. Moreover, we find some constructive takeaways for the prospects for growth in the second half of the year. First, the recovery has been less dependent on consumer spending that we had thought and the household savings rate has been significantly higher and, more importantly, has not fallen in the first half of 2010. Second, investment spending by businesses appears to be ramping up at a faster pace than we expected and, judging by the orders data for the second quarter, we expect this trend to continue into the second half of the year. Final domestic demand growth has picked up significantly but this has sucked in a lot of imports in the first half of the year with imports rising at an annualized pace of almost 20% in real terms (although exports were up a not too shabby 10.9% on the same comparison). Although some will see the second-quarter inventory build as a stumbling block to growth in the second half of the year, we think it was largely a desired build and note that inventory sales ratios in the monthly data remain close to record lows. Inventories are unlikely to add much to growth in the second half of the year, but we don’t see a retrenchment in inventories emerging that would significantly retard growth either, and we expect around 3% real growth in the second half of 2010.

This is very sad because at this stage of the recovery, growth should be 8% or more.  I don't think it an accident that the recovery is poor given the uncertainty in the regulatory and tax burden businesses will have going forward.

Employment costs rose, but this is not the report of interest that it used to be. However, it confirms the picture of modest gains in hourly earnings and benefits and does not point to the emergence of deflationary trends in wage setting. Labor costs are growing at less than the rate of productivity, resulting in declining unit labor costs (although ULCs will likely show a quarter-to-quarter increase in the second quarter) and expanding profit margins.
 
Source RDQ

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