Monday, August 30, 2010

Revising the Second-Quarter GDP

The second-quarter GDP figures were revised on Friday, and as expected, they moved sharply lower. Where second-quarter growth had originally been pegged at 2.4 percent, the figure has now been downgraded to 1.6 percent.

Leaving aside for the moment the question of what this means to the economy, you may be wondering: Why did the number fall so far? There are two basic answers:

(1) There wasn't a good measure of the dollar value of imports coming in to the U.S. until July 30. For the second quarter, as we know now, imports rose a whopping 32.4 percent (exports rose a more modest 9.1 percent). The purchase of all those imports doesn't add very much to the American economy.

(2) Much of the economic growth in recent quarters has been the result of businesses ramping up inventories that had gotten depleted, but we didn't see as much of that in the second quarter as originally anticipated. The Commerce Department now estimates inventories as adding 0.6 percentage points to GDP in the quarter, after an initial estimate of 1.1 percentage points.

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