Below we set out the components of real GDP that
comprise our 3% forecast for Q2.
Personal Consumption: We already have full
consumption data for April and May as well as auto sales
and retail sales for June. The only piece missing is June
services. We estimate real consumption grew at a 2.0%
annual rate in Q2. With consumption accounting for 70%
of GDP, real PCE will contribute 1.4 points to real GDP
growth (1.4 equals 70% of 2).
Business Investment: Data through May show
business investment in equipment and software was
unchanged in Q2. However, business construction
continued to boom, suggesting overall real business
investment will grow at about a 6% annual rate in Q2.
With business investment accounting for about 10% of
GDP, this translates into 0.6 points for real GDP growth
(0.6 equals 10% of 6).
Housing: Data on home building suggests a decline
at about a 23% annual rate in Q2. Given that the sector
makes up roughly 4% of GDP, this translates into a drag
of 0.9 points on real GDP growth (0.9 equals 4% of 23).
Government: Federal defense spending and public
construction at all levels of government were unusually
strong, suggesting gov’t spending accounts for 0.5 points
worth of real GDP rather than the 0.3 or 0.4 trend.
Trade: The inflation-adjusted trade deficit has been
shrinking rapidly. Even assuming no additional
improvement in June, net exports will add about 2.0
points to real GDP growth.
Inventories: We assume businesses around the
country reduced stockpiles at an annual rate of $37
billion, the largest reduction since the 2001 recession,
resulting in a drag of 0.6 points to growth.
Second Quarter GDP: = 3.0%
At the end of last year, Wesbury was one of the few economists predicting that the U.S. would avoid recession in 2008. So far at least, he has been right.