I visited recently with CNBC Worldwide Exchange to discuss the Q2 GDP report and why I suspect that it will be revised down over the next couple of months. In particular, I discussed the issue concerning real fixed sales and gross domestic incomes both of which, even after the annual data revisions, are at levels that historically indicate very weak economic growth. To wit:
"Real final sales can tell us much more about the state of the economy than just headline GDP. In the latest quarter, final sales of domestic product rebounded 2.3 percent after dipping 1.0 percent in the first quarter. However, as shown below, real final sales on an annual basis actually declined near levels that are normally associated with recessionary drags in the economy."
"As shown, real final sales were weaker than originally forecast in 2012, however, 2013 was revised up to stronger sales. Importantly, the decline in real final sales in the Q4 of 2013 and Q1 of 2014 has been substantially worse than originally thought. This sharp decline in real final sales is a primary contributor to the build in inventories. Companies have been producing products, which has boosted production numbers, but consumption has been weak.
Another very important factor of economic strength is gross domestic income. Gross domestic income is the total income received by all sectors of the economy and includes the sum of all wages, profits, and taxes, minus subsidies. Decline is gross domestic income, as shown in the chart below, have also been very indicative of forthcoming weakness in economic activity."
"Furthermore, when gross domestic incomes are viewed on an annualized basis the weakness in income becomes readily apparent. As opposed to real final sales which were revised stronger in 2013, gross domestic incomes were revised down. Currently, the annual rate of change of gross domestic incomes is at levels normally associated with economic weakness."
"The issue of income is crucially important in an economy that is nearly 70% driven by personal consumption expenditures (PCE). While there are many analysts hoping for a "revival in business spending" to boost the economy, it is unlikely that a sector that comprises roughly 15% of the economy can overcome the drag from consumers that comprise nearly 70%. Furthermore, businesses will only aggressively spend on fixed investments when consumer demand is growing beyond their capacity to meet it. The data suggests that those "hopes" may be somewhat misplaced."