Q2 GDP: Domestic recession and Export Strength

I look at unemployment data for two very important reasons. First, because it gives a general sense of where the economy is heading. Unemployment is both a lagging indicator (business is good/bad and so they are hiring/firing) and it’s a leading indicator (the US economy is driven by consumer spending, which in turn is driven by income). Unemployment at 6.1% is at recessionary levels.

But a far more specific reason to watch unemployment is that it can reveal which sectors are doing well. If boom times mean heavy hiring, then heavy hiring confirms boom times.

http://www.bls.gov/news.release/empsit.t14.htm
From March to July, preliminary figures say that payroll has dropped 215K jobs (seasonally adjusted), and at a constant rate of ~50K jobs per month. Because the actual numbers are massaged and rarely believable, I will concentrate on the trends.

Most of the drop is from construction and manufacturing, just as most of the rise is in extracting and shipping coal, gas, oil and other mined products.

Over 50% of all sectors are firing people. Ignore Healthcare and the government, and there is almost no hiring. But the strongest growth in employment in relative terms is oil & mining. Nearly 5% growth in payrolls in just 5 months. Business must be good for those sectors.

For the rest of the economy, however, things are clearly trending down. Compared to the last recession, unemployment rates are almost as high. Also interesting is how similar the unemployment picture looks compared with the 2001/2002 recession
Sharp spikes in unemployment on a month-to-month basis
All monthly changes are increases in unemployment

The GDP numbers are also revealing. The first challenge is that the reported figures are based on seasonally adjusted and inflation adjusted figures. The problem is that this methodology says that spending on electricity and gas has been flat for 5 months.
Instead, lets use the raw data – not adjusted for inflation or seasonality.

The 2008 Q2 GDP was $1.43T, a $600B increase over 2007 Q2 GDP of $1.38T.
* Personal Consumption $500B: $100B more for food (7% annual increase) & $120B for gas/electricity (23% increase). Also $100B for medical care.
* Private Investment -$150B: Continued commercial construction grew $75B but was more than offset by a $150B drop in home buying and a $75B drop in business inventories.
* Exports/Imports: Exports rose $300B and imports surged $313B.
* Government spent an extra $200B.

Think about this for a moment. GDP spending increased because people had to pay more for food, gas and healthcare. They stopped buying homes and businesses stopped adding inventory. The only big spending entity was the government. That is not productive growth and it is not a good picture of the future economy.

If anything, this is proof that we are in a major domestic recession and only exporters are doing well:
- Companies are hurting
- Corporate Profits are down 7% since last year
- Investment is down (15% of GDP) and businesses are unloading goods and not restocking
- Consumer spending (71% of GDP) is going to essentials (food, gas, medical) and squeezing out everything else
- Durable goods (7% of total GDP) is down 2%
- Non-durable spending is up (22% of total GDP) but that’s mainly on food & gas
- Service spending (42% of GDP) is up and that’s medical care
- Exports rose – but that’s mostly commodities, which is not broad based
- Imports also rose, but that does not reflect a strong consumer appetite but the higher prices paid for gas. Peel out the gas component, and spending on non-oil related products is sharply down.

Business is belt tightening in response to lower consumer spending – administrative and support staff are being laid off, inventory is being dumped and not replenished, what’s next?