I said in an earlier post that I was wishing for Q2 GDP to be between -1.0% and 0.0%. Unfortunately, accounting nuance will likely cause a lower number. Brian Wesbury is now forecasting -2.5% GDP for the second quarter (April – June). The consensus forecast back in May was -1.5%, it is likely more negative now. This is still a huge improvement from the -5.61% in Q1 of this year and -6.50% in Q4 of last year. The accounting nuance I mentioned is due to inventories, which is the amount of “widgets” businesses have on hand. I believe inventories are included in GDP because of the economic activity of having those widgets produced.
Businesses hold more inventories in the good times because they are selling widgets faster, and they deplete them in the bad times since too much inventory (supply) forces them to drop prices. It looks like in Q2 this year businesses were cautious and held their inventories down. This is bad news for Q2, but good for the future. Everything other than inventories should cancel to zero, so inventories themselves should account for all of the drop in GDP for this quarter. Inventories tend to be more volatile than the other parts of GDP, and as the economy ramps up this quarter, businesses will have to replenish their warehouses, compounding the increase from the other sectors. This should lead to large GDP growth numbers in the third and forth quarters of the year, and set the stage for an extremely strong 2010.
Update: The May trade deficit shrank more than expected! That should add enough to Q2 GDP to keep it between -1.5% and -2.0%. Small victories are what it’s all about!