The second estimate of second quarter GDP dropped slightly from 1.2% to 1.1% today. That matches the Bloomberg Econoday consensus. I predicted a slightly larger pullback to 0.9%.
Second-quarter GDP proved very soft, at only a plus 1.1 percent annualized rate for the second estimate following even softer rates in the prior two quarters of 0.8 and 0.9 percent. But masked in the latest quarter is a very strong 4.4 percent annualized growth rate for consumer spending which is 2 tenths higher than the first estimate. Inventory draw is the quarter’s culprit, pulling down GDP by a very steep 1.3 percentage points. But, in a counter-intuitive twist, lighter inventory in times of slow economic growth is a major positive for future production and employment and is a major plus for the ongoing quarter.
Residential investment is a disappointment in the second-quarter data, falling at a 7.7 percent annualized rate but following large gains in prior quarters. And building strength in new home sales points to a rebound for this reading in the third quarter. The biggest disappointment in the quarter is another decline, at a 0.9 percent rate, in nonresidential fixed business investment which points to business caution and continuing problems ahead for worker productivity. Price data show some pressure tied to oil with the GDP price index up 1 tenth from the first estimate to a year-on-year 2.3 percent.
The major takeaway from the second quarter is not the headline growth rate but the strength of the consumer, evident in the solid 2.4 percent rise in final sales, which is double the pace of the two prior quarters. The early outlook for the third quarter is positive, with estimates trending at about 3 percent growth.
GDP Trend
Doug Short at Advisor Perspectives provides these charts of GDP trendline growth.
Here is a log-scale chart of real GDP with an exponential regression, which helps us understand growth cycles since the 1947 inception of quarterly GDP.
The latest number puts us 15.1% below trend, the largest negative spread in the history of this series, a bit wider than the -15.0% in the Advance Estimate.
A particularly telling representation of slowing growth in the US economy is the year-over-year rate of change. The average rate at the start of recessions is 3.35%. All eleven recessions over this timeframe have begun at a higher level of real YoY GDP.
Statistical Noise
Rick Davis at the Consumer Metrics Institute provides this GDP Color Commentary regarding noise.
Arguably this report was merely statistical noise. It continued to show a US economy moving forward, but with a decidedly lack-luster 1.09% growth rate.
Key Items
- All things not consumer-related either weakened or remained in contraction.
- Consumer spending growth improved yet again, with most of that coming from savings.
- All of the reported growth disappears when a third party deflator (the BLS CPI-U) is applied to the data.
- Once again a mildly positive report masked considerable commercial weakness. We wouldn’t expect any other kind of report until the election is put to bed.
Mike “Mish” Shedlock
