Don't Believe the Hype on GDP

The predictable round of surprised economists and television commentators are going to be all over the place tomorrow when the GDP report turns out to be better than expected. Or maybe not.

Sure, the trade deficit narrowed, and that's going to goose the second-quarter figures some, but saying that's economic strength is like playing with Monopoly money. The real story is that the collapse in business spending is going to completely obliterate tomorrow's figure, and so the 0.9% consensus may end up being the right one.

Let's just get the basics out of the way: Lots of things make up GDP, but consumer spending is the most significant, accounting for about two-thirds of the figure. Last time out, the consumer carried the GDP report.

This time won't be much different, except we're a quarter later and the consumer isn't as strong as last quarter. Problem is, with the exception of the goofy figures in the trade deficit (which the Commerce Department could easily estimate lower), things have been downright stinky.

While there's no one figure that is used to measure "business investment," the monthly orders of nondefense capital goods are a good way to look at it. For the second quarter, nondefense capital goods orders dropped 25% on an annualized basis. As Bill Walton is wont to say on NBA broadcasts, that's just terrible.

Last quarter, nonresidential fixed investment rose 1.9%, which was a surprise, but it was largely because of a 15% rise in investments in structures: factories and offices.

You can forget about that kind of spending offsetting the figure this time out, though. Capacity utilization is at its lowest level since 1983, meaning companies aren't using their manufacturing space to begin with. And they're supposed to invest in more factories and production facilities? Not going to happen.

Last time out, the business investment portion of the GDP report subtracted 2.6 percentage points from the first quarter's GDP growth number. Overall, GDP was 1.2%. This time, the consumer is a bit weaker, and with the exception of the nutty trade deficit, everything else is significantly worse, especially business spending. There aren't going to be any miracles tomorrow.