–High Energy Px Cut Q2 Growth; Real Final Sales Remain Lackluster in Q3

By Joseph Plocek

WASHINGTON (MNI) – The latest GDP revisions put Q2 real growth at
+1.0%, down 0.3 point from the original estimate, but pretty much as
private analysts expected. Perhaps more important, about two-thirds of
the way into Q3, real growth appears to remain lackluster.

The Commerce Department said the revisions were widespread, as is
usually the case when additional information is collected.

Exports and inventory investment were revised lower based on new
data. Personal Consumption was revised up based on higher financial and
health services spending. These last were determined from bank call
reports and from higher healthcare hours worked in Labor Department
employment data.

Nonresidential investment was revised up, reflecting better
building seen in revisions to construction data. Software spending
also was revised higher because corporate revenue was up, as were these
imports and factory shipments.

The data continue to show rising investment and consumption, as
well as a 2.0% gain in federal government spending supporting growth.
Imports, inventories, and state and local spending cut growth.

State and local spending appears to be on a massive downtrend as
property values slide, posting -2.8% after -3.4% in Q1. S&L spending has
been declining since 2008. Federal expenditures were supported by a 7.1%
bump in defense spending.

Separately, Q1 wages were revised up $18.4 billion. This suggests
consumers had even better means to spend.

The overall GDP price index gained 2.4%. Core PCE prices were up
2.2%. Until the recent dips in crude oil work their way into the price
structure, prices might remain firm ahead, especially with rents rising.

With almost 2/3 of the Q3 calendar complete, real spending appears
weak. That is because the rate of inflation is matching retail sales
growth. August sales data are due next week, and are expected to
continue to show modest gains. That means Q3 real growth probably will
not pick up much from the slow pace of H1.

In addition, in H2 government stimulus is expected to wane and the
Federal Reserve’s monetary stimulus is not expected to pick up. So these
factors will not be adding to growth.

Preliminary Q2 corporate profits data showed current production
profits up $57.3 billion, after +$19.0 billion in Q1, as internal
corporate cash flow increased.

Profits before tax were up $8.7 billion after +$134.6 billion in
Q1. Domestic nonfinancial firms were in the black as costs fell and
prices were hiked, and profits from the rest-of-world component were
higher. Strong profits and lack of hiring are a puzzle of the 2011
economy.

Profits at financial domestic firms were down $54.2 billion after
-$38.7 billion in Q1, probably reflecting on-going mortgage losses.
Government-sponsored Enterprises continue to post losses and draw on
the U.S. Treasury, and many banks continue to reserve for real estate
problems.

The table below gives perspective on the GDP components:

GDP Components: Q3 Q4 Q1 Q2 prelim Q2 rev
Real growth +2.5% +2.3% +0.4% +1.3% +1.0%
Real final sales +1.7 +4.2 +0.0 +1.1 +1.2
PCE +2.6 +3.6 +2.1 +0.1 +0.4
Nonres fixed invest +11.3 +8.7 +2.1 +6.3 +9.9
Res fixed invest -27.7 +2.5 +2.4 +3.8 +3.4
Net Exports Contrib cut 0.68 add 1.37 cut 0.34 add 0.58 add 0.09
Inventory Contrib add 0.86 cut 1.79 add 0.32 add 0.18 cut 0.23

**Market News International Washington Bureau: (202)371-2121**

[TOPICS: M$U$$$,MU$$$$,M$$FI$,MT$$$$,MAUDS$]