Full text of United States Economic Update : Slowing Down

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Slowing Down
August 10, 2011
The advance release of gross domestic product (GDP) for second quarter 2011 reported that real output grew by only 1.3
percent annualized, below what most forecasters had predicted. Along with this disappointing reading on overall economic activity, GDP was significantly revised back to 2007.
The revisions can be broken down into three periods: a deeper
recession, a comparable recovery and a slower 2011
(Chart 1).
A Deeper Recession

Billions of chained 2005 dollars*
13,500
13,250

A Comparable Recovery

Slower
2011

Prerevision
real GDP

13,000
12,750

From the peak in fourth quarter 2007 to the trough in second
quarter 2009, real output is now estimated to have fallen 5.1
percent, compared with the prior estimate of 4.1 percent. Personal consumption expenditures accounted for about twothirds of the downward revision. Consumers pulled back in the
recession to an even greater extent than previously believed.
The revision to the categories of goods and services was
broad, with the largest downward revisions coming from financial and insurance services. Before the annual revisions of the
previous two years, no one would argue that the drop in output wasn’t large, but it wasn’t large enough to explain the disproportionate rise in unemployment above its natural rate.1
This statistical relationship between changes in the output gap
and changes in the employment gap had previously been so
consistent that it was dubbed “Okun’s Law,” after President
Kennedy’s economic advisor who identified it. The apparent
breakdown suggested a possible shift in the way firms respond
to cash flow pressures or even a substantial rise in the structural rate of unemployment. The annual GDP revisions in July
2010 and 2011 showed a deeper recession: The revisions almost completely erased the discrepancy between output and
unemployment and the need for explanation (Chart 2).

Postrevision
real GDP

Comparable
recovery

Deeper
recession

12,500
2006

2007

2008

2009

2010

2011

*Seasonally adjusted, annualized rate.
SOURCE: Bureau of Economic Analysis.

Chart 2
Revision Corrects Breakdown in Okun's Law
Change in employment rate gap
(percent, using CBO natural rate)
0
-10
-8

-6

-4

-1

'90–'91

-2

'80
'01–'02

'60–'61
-2
'69–'70
-3
-4

'73–'74

'57–'58
'81–'82

'08–'09 2010:Q1 release
-5

2010:Q2 release
2011:Q2 release

Change in output gap (using CBO potential GDP)
SOURCES: Bureau of Economic Analysis; Bureau of Labor Statistics;
Congressional Budget Office; author's calculations.

A Slower First Half of 2011

The total rate of recovery through 2010 was hardly revised.
The average quarterly growth rate from second quarter 2009
to fourth quarter 2010 was revised from 2.95 to 3.00 percent
annualized. The almost unchanged average masks the altered
pattern of growth. Prerevision estimates showed a strengthening recovery that slowed down in second quarter 2010 but
then regained its footing in the second half of the year. The
revised data show a still strong recovery in second quarter
2010 followed by consistently decelerating growth. Some of
this revision comes from a better adjustment for seasonal factors in oil imports. In other words, some of the volatility in
reported GDP last year was normal seasonal variation
(Chart 3).
Federal Reserve Bank of Dallas

Chart 1
Real GDP Has Been Revised Downward

Real GDP growth in first quarter 2011 was revised down from
1.9 to 0.4 percent annualized. The composition of the revision is less troubling because a whole percentage point of the
revision came from inventories, which can be traced back to
now-fading supply chain disruptions. The fallback in government spending remained the key source of the slowdown in
the first quarter, subtracting 1.2 percentage points from
growth, with the federal government responsible for twothirds of that. The second quarter was boosted by less of a
drag from government and strong net exports, but personal
consumption expenditures collapsed (Chart 4).
This too can be partly attributed to fading factors. Depressed

National Economic Update

1

Chart 3
Revised Sequence of Growth in 2010
Quarterly growth*
6
4
2
0
-2

Prerevision real GDP
Postrevision real GDP
Only petroleum imports revised**

-4
-6
-8
-10
2007

2008

2009

2010

2011

*Seasonally adjusted, annualized rate.
**Revision to growth contribution approximated.
SOURCES: Bureau of Economic Analysis, author's calculations.

Chart 4
Consumption Collapsed in the Second Quarter
Percent*
3.5
2011:Q1 prerevision
2011:Q1
2011:Q2
Average of 2009:Q3 - 2010:Q4

3.0
2.5
2.0

1.9
1.5

1.5

1.5

1.3

0.6
0.4

0.5

0.1

0.6
0.3

0.2 0.2

0.1

0.1

0.2

0.0
-0.1 -0.1

-0.2

-0.5

-0.3

-1.0
-1.2 -1.2

-1.5
GDP

Consump.

Nonresid.
fixed invest.

Resid.
invest.

Inventory
invest.

The better-than-expected July employment report was a welcome relief after a string of disappointing data. Nonfarm private
payroll employment increased by 154,000 in July, and June and
May were revised up to increases of 80,000 and 99,000, from
the previous estimates of 57,000 and 73,000. Government employment continued to trend down, subtracting 37,000 jobs,
some of which can be attributed to the temporary Minnesota
state government shutdown. This left total nonfarm employment growth for July at 117,000, probably not enough to keep
up with population growth, but consistent with a still-growing
economy. The household survey reported a small decrease in
employment that was offset by a larger decrease in the labor
force, lowering the unemployment rate to 9.1 from 9.2 percent.
Financial Markets Unsettled

1.3

1.0

consumer spending on motor vehicles and parts subtracted 0.7
percentage points from second-quarter private consumption
growth, while growth in consumer spending on nondurables
and services was weak throughout the first half due to higher
gasoline prices. Year-over-year real GDP growth is now at 1.6
percent, and total output is back below its prerecession peak.
The past appears to be dimmer, but the details still do not rule
out a brighter second half. Payroll Employment Improves

Net exports Government

*Contribution to real GDP growth, seasonally adjusted, annualized rate.
SOURCE: Bureau of Economic Analysis.

Chart 5
High-Yield/AAA Corporate Spread Widening

Financial markets have moved cautiously since disruptive geopolitical events early in the year, gauging the potential impacts
of higher commodity prices on U.S. growth and the slowly unfolding European debt crisis. These concerns accelerated in the
first week of August. Chart 5 shows the spread between yields
on junk bonds and AAA-rated corporate bonds has been on the
rise since its three-year low in February, increasing from 200 to
250 basis points at the end of July, and then jumping to 419 by
Aug. 9. This is associated with increasing uncertainty. As the
economic outlook deteriorates, there is an increased probability
of default, and more-risky bonds have to pay a higher premium
relative to bonds seen as safe.
Looking Ahead

Basis points
500

300

Incoming data and revisions to past data dampened expectations. The relief of resolved U.S. debt negotiations was quickly
replaced by questions regarding the strength of the global recovery. There are obvious reasons for caution, but leading indicators still point to growth, and employment continues to increase, however slowly.

250

—Tyler Atkinson

Aug. 9
419

450
400
2010 average

350

200

……………………………………………………………………………..………………

Feb.18
191

150
Jan

Mar

May

Jul
2010

Sep

Nov

Jan

Mar

May

Jul
2011

SOURCES: Federal Reserve Board of Governors, Bank of America/Merrill Lynch.

About the Author
Atkinson is a research assistant in the Research Department of
the Federal Reserve Bank of Dallas.
Notes
1.

Federal Reserve Bank of Dallas

“Recent Unemployment Increases Break the Law,” by
Nicole Ball and Evan F. Koenig, Federal Reserve Bank of
Dallas National Economic Update, June 29, 2009.

National Economic Update

2