Let's continue our look at today's GDP report with a closer look at domestic investment.
Total domestic investment is increasing at a solid rate.
Non-residential investment was just positive last quarter, although I wouldn't hold my breath about this number moving strongly higher in the near future.
Equipment and software investment increased at a strong pace, as did
Residential investment.
2 comments:
Investment in equipment and software is already on a strong decline as indicated by recent data on new orders and Intels very negative report just yesterday which talked about the big decline in PC orders and margins. REsidential investment should be way down in Q3. The fiscal stimulus will be a drag on Q3 GDP. Imports will continue to be a drag on Q3 GDP. And if July and so far in August is any indication, retail sales are negative this quarter as well, though PCE will probably advance because of increased health care spending. Most the increase in PCE during this recession has been because of increased govt transfer payments and particularly deficit spending into health care. State and local spending will not be up in Q3 either. So it's hard to make a case for GDP in Q3 to be any better than 1% at the very best, and very likely it could come in at -0.5% or -1%.
1.) Investment in equipment and software is already on a strong decline as indicated by recent data on new orders and Intels very negative report just yesterday which talked about the big decline in PC orders and margins.
No. According to Bernanke's Jackson Hole Speech, we see the following:
"Businesses' investment in equipment and software should continue to grow at a healthy pace in the coming year, driven by rising demand for products and services, the continuing need to replace or update existing equipment, strong corporate balance sheets, and the low cost of financing, at least for those firms with access to public capital markets."
2.) "REsidential investment should be way down in Q3."
This is possible. However, this has been a drag on GPDI for the previous two quarters and as such I am not expecting it to be a major part of any pick-up.
3.) "The fiscal stimulus will be a drag on Q3 GDP."
Drag? No. See this article from the WSJ.
4.) Imports will continue to be a drag on Q3 GDP
No. The last time imports increased by this amount on a quarter to quarter basis was 1984. In other words, this is an extremely rare situation. In addition, with the dollars recent drop we should see a continued increase in exports.
5.) And if July and so far in August is any indication, retail sales are negative this quarter as well, though PCE will probably advance because of increased health care spending.
While retail sales have been at more or less the same level for the last 4 months, e-commerce sales continue to increase and are taking up some of the slack.
Health care spending only accounts for 16% of PCEs.
In addition, total PCEs were $10,040.7 billion in 3Q09 and $10,279.6 in 2Q10, for an increase of $238.9 billion. Over the same period, we saw health care spending increase from $1,672 trillion to $1,629.5 trillion for an increase of $62.6 billion. So, health care accounted for 17.83% of the total increase in PCEs for the last 4 quarters.
However you slice your health care argument, it comes up short.
6.) "Most the increase in PCE during this recession has been because of increased govt transfer payments and particularly deficit spending into health care. State and local spending will not be up in Q3 either."
The increase in government transfer payments is the direct result of the stimulus program, who's primary purpose was to ameliorate the effects of high unemployment. In other words, the increase in transfer payments prevented a complete and total crash. With unemployment over 9%, and low capacity utilization, this trend will continue.
See the points above regarding health care. This argument is wrong.
7.) State and local spending will not be up in Q3 either
This depends on Washington at this point.
8.) So it's hard to make a case for GDP in Q3 to be any better than 1% at the very bes
If you read my central thesis about this recovery, you would know I expect growth in the 1%-2% range.
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