July Jump in CPI Suggests Third Quarter Growth Could be Negative

One item largely overlooked in the reporting on the surprisingly large jump in the July CPI is its implications for growth. The 0.8 percent jump in the CPI will almost certainly exceed the increase in nominal consumption spending for the month (nominal retail sales fell in July), which means that consumption spending will show a decline for the second consecutive month. With the last round of rebate checks arriving in July, and the economy continuing to shed jobs, it is unlikely that August and September will show any big burst in consumption.

Therefore consumption spending, which comprises 70 percent of GDP, is likely to fall in the 3rd quarter. There is little chance that housing will show a positive number for the quarter and non-residential investment will be at best a weak positive. Spending by state and local governments will also be weak or negative, as deficits force cutbacks in the new fiscal year.

Last quarter, trade gave a big boost to GDP, and this number will be revised upward based on the June trade data. However, it is unlikely that we will see much improvement from the 2nd quarter trade numbers, with most our trading partners now slipping into recession.

In short, it is very likely that the third quarter GDP number will be negative. That may not mean very much in itself. GDP numbers are always somewhat erratic, and there is not much difference in the real world between a small positive and a small negative number. But, the 3rd quarter GDP figure will be released the Thursday before the election. It is the last major pre-election data release. Coming at that time, a negative number is likely to draw considerable attention.

--Dean Baker