Goldman On Q2 GDP: Sluggish Consumption, Growth Moderating

Yet more pessimism from Goldman's Jan Hatzius, who sees a consistent decline in end-consumption. But how can that be when even Bloomberg now writes that Americans Buy IPads While Broke in New Abnormal Economy...

Growth Moderates in Q2 with Consumption Sluggish

BOTTOM LINE: Q2 growth roughly in line with expectations-higher than ours, a bit lower than the median forecast-as surprises in various components offset. Construction and inventory accumulation were higher; trade was weaker. Underneath all that consumption is sluggish. Recession looks a bit deeper on revision, as suspected. Core PCE inflation revised up about 0.2 points on average in recent quarters. Employment costs rise in line with median forecast and a touch more than we thought, mostly due to an increase in public sector benefits.

US-MAP: Real GDP growth 0 (4, 0).

KEY NUMBERS:

Real GDP +2.6% in Q2 (qoq, annualized, +3.2% yoy) vs. GS +2.0%, median forecast +2.6%.
GDP price index +1.8% in Q2 (qoq, annualized, +0.8% yoy) vs. GS +1.0%, median forecast +1.1%.
Core PCE price index +1.1% in Q2 (qoq, annualized, +1.5% yoy) vs. GS and median forecast +1.0%.
Employment cost index +0.5% in Q2 (qoq, +1.8% yoy) vs. GS +0.4%, median forecast +0.5%.

MAIN POINTS:

1. The economy grew at a 2.4% annual rate according to the preliminary official estimate. This was somewhat higher than our 2% figure but a bit lower than the median. Revisions stretching to 2007 show that the recession was deeper than previously estimated-a peak-to-trough drop of 4.1% in real GDP vs. 3.7% in the old numbers-and a slightly slower uptake during the first two quarters of the recovery (second half of 2009). Q1 growth was revised up substantially, however.

2. Although the broad outlines of growth in Q2 were about as expected-large gains in residential and business investment and federal spending versus a deep setback in trade-all of these were more extreme than we had estimated. Inventory accumulation was faster than expected, contributing one percentage point to Q2 growth. This plus the unsustainability of the gains in construction-led by a nearly 28% annualized increase in the residential component-emphasizes the downside risks to growth in future quarters, especially as real consumer spending was sluggish. That said, the trade drag will also reverse. On balance, we see little in the first look at these numbers to alter our view that the economy will remain sluggish in the period immediately ahead.

3. The inflation components of this report contained a number of surprises. In Q2, the GDP price index rose much more than expected; however, the historical data were actually revised down a touch. A more puzzling pattern appears in the core index for personal consumption expenditures, where a more modest upside surprise in Q2 followed upward revisions averaging about 0.2 percentage points in recent quarters.

4. The second-quarter employment cost index - a measure of total employee compensation that controls for changes in the composition of employment - rose 0.5% (not annualized), in line with consensus. Wages grew more sluggishly at 0.4% in both the private and public sectors. A 0.9% increase in the value of public sector benefits explains the difference.