Goldman's Take On Q2 GDP: Ongoing Inventory Accumulation Still A Correction Threat

Sorry folks, nothing good to extrapolate based on the just released (and soon to be revised lower one final time) GDP data - from Jan Hatzius: "Implications for Q3 growth are probably slightly negative, though much depends on the monthly data to be released over the next few weeks, starting with Monday's report on consumer spending in July. The reason for this bias is that inventory accumulation, at an annual rate of $63.2bn in the second quarter, is still high enough (+3.7% at an annual rate) to put the economy at risk of at least a mild correction in this component as demand slows to a rate well below this rate. Although final sales to domestic purchasers were revised up to a +4.3% annual rate, this includes an increase in residential investment that is already in process of reversing as well as the effects of the decennial Census. And while much of the trade drag may well be reversed, the starting point for Q3 is a deep hole, so that's more likely to be a Q4 event." The only question is does Joe LaVorgna revert to a 10% H2 GDP now that his flip flopping on Q2 GDP (which he conveniently revised to 1% a few days back) was proven to be too fatalistically dire.

Downward Revision A Bit Smaller than Expected

BOTTOM LINE: Real GDP revised down a bit less than expected, with the main high side surprises in consumption and inventory accumulation, offset to some degree by an even deeper trade deficit than expected. Report suggests increased vulnerability in Q3 if demand slows, as it appears to be doing. Price indexes close to original estimates. Profits post firm (+25.3%) year-to-year gain after taxes, but second-quarter sequential gain is only half as firm.

KEY NUMBERS:
Real GDP growth revised down 0.8 points to +1.6% in Q2 (qoq, annualized, +3.0% yoy) vs. GS +1.2%, median forecast +1.4 %.
GDP price index revised up 0.1 point to +1.9% in Q2 (qoq, annualized, +0.8% yoy) vs. GS +1.8%, median forecast +1.8 %.
PCE core price index unchanged at +1.1% in Q2 (qoq, annualized, +1.5% yoy) vs. GS +1.1%, median forecast +1.1 %.

MAIN POINTS:
1. As widely expected, growth in the second quarter was slower than first estimated by the Commerce Department, but the size of the revision was not quite as large as we or the median forecast anticipated. Relative to our expectations, the main high-side surprises were in consumer spending (mostly services, where the other information available to us is not as good, and nondurables) and in inventory accumulation (where valuation/deflation can drive even the most dedicated economist bats). On the other hand, the trade deficit was revised to show even a larger drag than we had penciled in based on an extremely weak trade report. This drag-which sliced 3.37 percentage points off of real GDP-is largest quarterly trade drag since the initial quarter of this data series in 1947.

2. Implications for Q3 growth are probably slightly negative, though much depends on the monthly data to be released over the next few weeks, starting with Monday's report on consumer spending in July. The reason for this bias is that inventory accumulation, at an annual rate of $63.2bn in the second quarter, is still high enough (+3.7% at an annual rate) to put the economy at risk of at least a mild correction in this component as demand slows to a rate well below this rate. Although final sales to domestic purchasers were revised up to a +4.3% annual rate, this includes an increase in residential investment that is already in process of reversing as well as the effects of the decennial Census. And while much of the trade drag may well be reversed, the starting point for Q3 is a deep hole, so that's more likely to be a Q4 event.

3. Price indexes did not move too much. The GDP index was revised up 0.1 point; the PCE core index was unchanged.

4. As we had expected and the market had already seen in company reports, profits were firm in the second quarter. After-tax profits rose 25.3% from their year-earlier level after adjustment for inventory valuation and capital consumption distortions. However, the pattern is clearly one of slowing as the second-quarter increase was only 2.9%, or 12.1% at an annual rate.