U.S.

Economic Watch
U.S., July 30, 2010
Gross Domestic Product: 2Q10 Advance
Economic Research
Economic recovery is slowing down
Hakan Danış
hakan.danis@bbvacompass.com
US real Gross Domestic Product (GDP) grew 2.4% in the 2Q10
BEA revised upwards its GDP growth estimate for 1Q10 to 3.7% from 2.7%
The recession is worse than previously estimated

US economy grew slower in 2Q10 but higher than expected in 1Q10

Today, the Bureau of Economic Analysis (BEA) released its advance estimates of GDP for 2Q10.
The report shows that the US economy grew 2.4% (qoq, annualized) in 2Q10. This is lower than
our baseline scenario and due to a level effect caused by revising up its first quarter estimates.
The preliminary and final GDP estimates will be released on August 27 and September 30, 2010,
respectively.
There are both positive and negative news in the new release. Negative news is the further
slowdown in private consumption expenditures (PCE) and a significant increase in real imports.
PCE increased only 1.6% in 2Q10 compared to 1.9% in 1Q10. Weak PCE growth can be
attributed to the ongoing household deleveraging process, increased uncertainty in the economy
and high unemployment rates. Within PCE, durable goods increased 7.5%, while nondurables
and services increased only 1.6% and 0.8%. Net Exports continue to be negative in the second
quarter. While real exports increased 10.3% after increasing 11.4% in the first quarter, growth in
real imports accelerated further. Real imports increased 28.8% and net exports reached -
$425.9Bn in total in 2Q10.
In the second quarter, government spending and change in private inventories made a significant
contribution to the economic growth. Government spending increased 4.4% which includes a
12.9% increase in non-defense Federal spending. Real private inventories contributed 1.05 pp to
2Q10 compared to 2.64 pp in 1Q10 indicating that the inventory adjustment is coming to an end.

Graph 1 Graph 2
PCE, YoY % change
s
Private Investment, YoY % change
6 20 20

5
15
15 10
4
10 5
3
0
2 5 -5
1
0
-10
0
-15
-1 -5 -20
-2 Nondurable goods -25
-10 Residential Investment
-3 Services
-30 Non-residential Investment
Durable goods
-4 -15 -35
90 92 94 96 98 00 02 04 06 08 10 90 92 94 96 98 00 02 04 06 08 10

Source: BEA Source: BEA

 Positive news is the strong growth in residential (RI) and non-residential investment (NRI). NRI
increased 17% in 2Q10, the second highest quarterly increase since 4Q97. This is also the first
YoY growth rate since 2Q08. Boosted by the tax credit which expired last April, RI increased
significantly, 27.8% in the second quarter. This is the second time that RI has increased since
2006 and highest quarterly gain since 1983. This is also the first YoY growth since 1Q06.
However, latest economic surveys and data releases indicate that with the expiration of the tax
credit, high unemployment rates and tight credit markets, the housing market could continue to be
a drag on the economy in the second half of 2010.
BEA revised down its estimates of real GDP for 2007-2009
In today’s release, BEA also revised its previous estimates since 1Q07. Based on the revised
estimates, US economy grew 3.7% in the first quarter compared to 2.7%. BEA had previously
estimated 1Q10 growth as 3.2% in April and revised it downwards to 3.0% and 2.7% in May and
June, respectively. BEA’s new estimates also indicate that the recession was worse than
originally estimated. The real GDP growth rates between 2007 and 2009 were revised down for
0.2 pp for 2007, 0.4 pp for 2008, and 0.2 pp for 2009. Therefore, US economy grew only 1.9
compared to 2.1 in 2007 while it contracted -0.001% and 2.6 compared to 0.4 and -2.4 in 2008
and 2009, respectively. Revised estimates also show an even weaker PCE growth during the
recovery period.
Economic recovery is slowing down
Recent economic trends confirm that substantial economic slack remains and the pace of growth
is going to ease in the second half of the year. With tight credit markets, high unemployment
rates, and increased uncertainty due to Europe’s sovereign debt problems, the economic
recovery is likely to be slow. Although RI positively contributed to the economic growth in 2Q10,
recent data indicate that the housing industry could remain a drag to the economy in 2H10.
Consistent with our baseline scenario, we expect GDP to continue to expand in 2H10 but at a
slower rate. We forecast that the US economy will grow 3.0% and 2.5% in 2010 and 2011,
respectively. Given today’s release, we also believe the Fed will continue to be cautious and will
delay interest rate hikes until 3Q11.

Table 1 Graph 3
GDP & PCE, QoQ annualized, % change Housing Starts & RI, annual % change
s

GDP PCE
20 15
Revised Previous Revised Previous
Est. Est. Est. Est. 10 10
Housing
1Q07 0.9 1.2 2.4 3.7 Starts 5
0
2Q07 3.2 3.2 1.5 1.1
3Q07 2.3 3.6 1.7 1.9 0
-10
4Q07 2.9 2.1 1.4 1.2 -5
1Q08 -0.7 -0.7 -0.8 -0.6 -20
2Q08 0.6 1.5 0.1 0.1 -10
3Q08 -4.0 -2.7 -3.5 -3.5 -30
Residential -15
4Q08 -6.8 -5.4 -3.3 -3.1 -40 Investment
-20
1Q09 -4.9 -6.4 -0.5 0.6
2Q09 -0.7 -0.7 -1.6 -0.9 -50 -25
3Q09 1.6 2.2 2.0 2.8
-60 -30
4Q09 5.0 5.6 0.9 1.6
1Q10 3.7 2.7 1.9 3.0 00 03 06 09

Source: BEA Source: BEA and US Census Bureau

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