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1) The U.S. economy barely sustained growth in 2Q02.
2) Economic growth was weakening heading into July.
GDP numbers
Revisions for the last 3-years arrived today and, to be blunt, they were awful. Not only did the U.S. economy post back-to-back-to-back quarters of economic decline in 2001, but $143.2 billion was erased from corporate profits before tax with inventory valuation and capital consumption adjustments for the 3-years ended 2001. Moreover, today’s GDP report highlighted the fact that U.S. businesses are not yet spending, and the Fed’s Beige Book confirmed this trend later in the day with six simple words: “continued weak demand for business loans.”
Today’s ‘rear-view’ indicators confirmed that economic activity is on decline. However, some people would have you believe that rear-view economic statistics are meaningless. To be sure, the 9 member American Bankers Association's economist advisory committee, which usually meets only twice a year (Jan/June), held a special meeting on Monday and stated that, “We're still in that same 3.0 to 3.5 per cent (annualized GDP growth) neighborhood for the economy for the rest of the year and into 2003”. The Committee held its special conference call to discuss the impact of slumping stock prices – apparently they couldn’t envision any such impact even though consumer confidence has been slumping. Today’s GDP numbers may have confirmed that economists are not taking the markets decline seriously enough.
As has been well documented, most economists were late in predicting the 2001 recession and they completely missed forecasting the economic turnaround in late 2001. Are they late in calling the 2002/2003 recession? Time will tell.
As for the BEA GDP numbers: when growth is slumping the BEA tends to overshoot its advanced GDP estimates and when growth is rebounding, as was the case during 4Q01, they tend to undershoot. Currently growth is slumping. As such, expect the first downward revision to 2Q02 GDP on August 29, 2002. Moreover, if the BEA is as far off the market as they were in 4Q00 and 2Q01, we may find out a year from now that another U.S. recession began in 2Q02.
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