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By New_Deal_democrat July 30, 2014 2:19 pm
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Second quarter GDP: very good, likely getting better, but a caution for 2015

The second quarter advance real GDP print of  +4.0% reported this morning is certainly welcome news, as was the upward revision of Q1 to a slightly less awful -2.1%.  Still, as needs to be said, that averages out to a meager +0.9% for the entire first half.


But hold the glass-half-empty DOOM.  There's good reason to think this estimate will be revised even substantially higher.  At the same time, this GDP does continue a cautionary signal for later 2015.


First, the good news. As I reported a month ago, first quarter GDP was so awful in large part due to how the impact of Obamacare was measured.  The same thing happened 50 years ago, when Medicare was introduced.  Back then, after a big decline for several quarters, GDP roared ahead once the adjustment was made, as shown in this graph:



Now, here's a table from the BEA showing, at the third line from the top, the impact of health care consumption expenditures for each quarter beginning in Q2 of last year.



Note that through last year, health care spending, which has been about 1/6 of total GDP, was about +0.4% per quarter.  Then it tanked in Q1 of this year. The last entry, for 2Q 2014, is a paltry +0.08%.


I do not believe the survey of health care providers that gives rise to this number has been reported yet.  Should that report show a bounce back to +.3% of +.4%, then Q2 GDP is going up to over +5.0% at least!


That's the good news. But there is a little bad news, looking forward to next year, mixed in.


As you all probably already know, housing leads the economy.  Professor Edward Leamer of UCLA

has calculated that, on average, housing a/k/a private residential fixed investment, tends to lead a downturn in GDP by an average of 5 quarters.


Well, although this metric did turn up in the second quarter, it has not surpassed the high it set in the third quarter of last year:



That does NOT mean that we are two quarters away from a recession.  But since interest rate have not made a new low in two years, and since real corporate profits have not made a new high since the third quarter of last year, we have 3 long leading indicators telling us that 2015 might be much less sanguine for growth.


We'll get a first read on Q2 profits deflated by unit labor costs in a month. We also want to pay attention to real per capita consumer spending, and real money supply.   Only if at least two of those turn down will there be a much more serious caution signal for 2015.








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