U.S. Economy Stays Above Flatline

The all-important revision to second-quarter GDP came in better than expected this morning, giving stocks a psychological boost.

But make no mistake about it: the revision from 0.7% growth to 0.2% growth means the U.S. economy was very weak in the second quarter, and the third quarter has also started on a weak note. The final second quarter GDP number will be released next month, so traders will get one more chance to fret over the number. And then they can start worrying about the third-quarter number.

GDP is important because the basic definition of a recession is two quarters of negative GDP. The second-quarter numbers are the economic equivalent of looking in the rearview mirror, but the headline number is important to fragile consumer and investor confidence. However, it is likely that the official referee of the economy, the National Bureau of Economic Research, will eventually rule this a recession; top officials of the group have already said as much. NBER defines a recession as “a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment, real income, and wholesale-retail trade.”

There is one unmistakable positive in the report: the drop in GDP is due largely to falling inventories, which sets the stage for an eventual economic recovery. However, inventories are only half the recovery equation: the other half is a rebound in sales, and that has yet to materialize. The inventory to sales ratio has been rising.

And in the bigger picture, the world economy is facing its first global recession in 10 years, and probably its worst in 50 years. In previous global recessions in 1975, 1982 and 1991 (defined as world GDP lower than 2.0%), global GDP ranged from 1.2% to 1.9%, according to The Economist magazine. But in the second quarter of 2001, JP Morgan estimates that global GDP fell 0.3%, with China and India the lone bright spots. A synchronous global recession is a rarity; the Economic Cycle Research Institute says this is the first one in 50 years.

And that’s the problem here: there is no engine this time to pull the global economy out of its slump. The global recession could get worse from here, or it could get better, but one thing appears certain: the recovery likely won’t be strong. Or quick.