Shocking 2nd Quarter GDP Report Points to Further Recession

I posted a few days ago when the 2nd quarter GDP report was released, and promised to follow up when I could get back to my desk and crunch the numbers to arrive at per capita GDP, with and without stimulus spending. 

I was so shocked at the results that I had to double and triple-check the figures!  Remember that the government reported that real GDP (adjusted for inflation) rose at an annual rate of 2.4% in the 2nd quarter, a pretty anemic report.  When expressed in per capita terms, accounting for population growth, real per capita GDP rose at an annual rate of only 1.5%.  But the really shocking news is just how much the stimulus plan spending contributed to that anemic report.  In the 2nd quarter, Economic Recovery Act spending soared to $182 billion, raising the total amount of stimulus money spent so far by 58% in one month! 

It’s important to track what the underlying economy is doing with this stimulus spending stripped away, because the stimulus spending is going to end soon.  If this spending is stripped out of the GDP report, real per capita GDP fell in the 2nd quarter by 3.6%, the worst rate of decline since the economic crisis began in 2008!  Here’s the chart:

Real Per Capita GDP

I can’t account for the explosion of stimulus spending in the 2nd quarter.  It may be due to the homebuyer tax credits that expired at the end of June.  There’s also the possibility that there was simply some “catch up” in reporting in the 2nd quarter.  Regardless, this is an absolutely devastating GDP report and portends extremely serious problems for the economy when the stimulus plan has run its course. 

You may recall that I’ve been predicting another massive stimulus plan to follow on the heels of this one.  But there’s simply no appetite in Congress for passing another.  Well, I read rumors this morning that the Obama administration plans to bypass Congress in August and effectively implement another $800 billion in stimulus by ordering Fannie Mae and Freddie Mac to forgive part of the balance on mortgages that are “under water.”  He can do this without Congress’ approval.   (Here’s a link:  http://blogs.reuters.com/james-pethokoukis/2010/08/05/an-august-surprise-from-obama/)

None of this comes as a surprise.  The stimulus bill bought Obama time to make real fixes to the economy – primarily fixes to our trade policy that would correct trade imbalances and bring home millions of high-paying manufacturing jobs.  But no fixes were made.  Now the stimulus money is spent and there’s nothing to show for it. 

As if the 2nd quarter GDP report wasn’t bad enough, analysts are already expecting a significant downgrade when the next revision comes out next month, lowering their forecasts to 1.7%.  All indications are that the economy is in serious trouble.  Like I said in my last post, look for the economic you-know-what to start hitting the fan in coming months.

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One Response to Shocking 2nd Quarter GDP Report Points to Further Recession

  1. […] Forgive me for taking a moment to toot my own horn but, in the Reuters article for which I’ve provided a link above, Reuters has finally taken note of the same thing I reported on August 5th – that 2nd quarter GDP was propped up by enormous stimulus spending, without which the economy may very well have sunk back into recession.  (See https://petemurphy.wordpress.com/2010/08/05/shocking-2nd-quarter-gdp-report-points-to-further-recessi…) […]

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