Today's first estimate of Q1 GDP growth is expected to show the US economy growing at a whopping 8.5% rate as government aid and vaccinations fuelled spending. The problem, as discussed recently, is that it's all downhill from here with Goldman recently slashing its GDP outlook and expecting growth to slide to a muted trendlike 1.5%-2.0% by the end of 2022. Of course, as Bloomberg's Laura Cooper notes, slowing momentum from an exceptionally strong level doesn’t mean a stalled recovery with the Atlanta Fed’s nowcast still pointing to still-robust activity in July. High-frequency gauges suggest consumer spending remains strong. And solid job gains can extend as workers return to the workforce, with the labor market outlook “very strong”, according to Powell. Of course, risks remain given stumbles towards herd immunity with only half of the country fully vaccinated. And hesitancy is becoming a more prominent risk. But while the variant spread alongside rising infection rates can slow the recovery, it’s unlikely to derail it - even if more data surprises are in store.
And while few would really care about GDP as a result, the BEA managed to shocked market watchers when it reported that in Q2 GDP rose just 6.5% SAAR, a huge miss to the expected 8.5%, and just barely higher than Q1's 6.4% annualized rate. The print was such a surprise many were wondering if someone at the BEA had a fat finger accident.
What was behind the huge miss: the main cause was an unexpected drop in inventories, which subtracted 1.13% from the bottom line GDP print. This number was expected to be positive (more below). Another reason is that the GDP Price Index (deflator) rose 6% annualized, vs 5.4% forecast. This subtracted a further 0.6% from the annualized GDP print.
Digging through the numbers, the second-quarter increase in real GDP reflected increases in consumer spending, business investment, exports, and state and local government spending that were partly offset by decreases in inventory investment, housing investment, and federal government spending. Imports, a subtraction in the calculation of GDP, increased.
- The increase in consumer spending reflected increases in services (led by food services and accommodations) and goods (led by other nondurable goods, notably pharmaceutical products).
- The increase in business investment reflected increases in equipment (led by transportation equipment) and intellectual property products (led by research and development).
- The increase in exports reflected an increase in goods (led by non-automotive capital goods) and services (led by travel).
- The decrease in inventory investment was led by a decrease in retail inventories.
- The decrease in federal government spending primarily reflected a decrease in nondefense spending on intermediate goods and services.In the second quarter, nondefense services decreased as the processing and administration of Paycheck Protection Program(PPP)loan applications by banks on behalf of the federal government declined.
A look at the numbers reveals the following:
- Real Personal Consumption came in at 7.78%, higher than the 7.74% in Q1. On an annualized basis it came in at 11.8%, far above the 10.5% expected and above the 11.4% in Q1. In other words, consumer were not the reason for the big miss in Q2. Final sales to private domestic purchasers q/q rose 9.9% in 2Q after rising 11.8% prior quarter
- Fixed Investment contributed just 0.57% to the bottom line GDP print, a big drop from the 2.25% in Q1. Nonresidential fixed investment, or spending on equipment, structures and intellectual property rose 8% in 2Q after rising 12.9% prior quarter
- A big surprise was in the change in Private Inventories, which shrank -1.13% on expectations of an increase. It followed last quarter's 2.62% inventory destocking, and suggests that there will be a lot of pent up inventory rebuilding growth in the quarters ahead.
- Trade, or net exports (exports less imports) subtracted another -0.45% from the headline GDP print, as exports turned positive 0.64% reversing Q1's -0.30% drop. But it was continued imports - a GDP detractor - which subtracted -1.09% from the headline number.
- Finally, government consumption subtracted another -0.27% from the headline print, a big drop from the 0.77% boost earlier.
Elsewhere, the BEA reported that real disposable personal income (DPI) — personal income adjusted for taxes and inflation— decreased 30.6% in the second quarter after increasing 57.6percent (revised) in the first quarter. A more updated number will be revealed tomorrow when we will get the personal income and spending data for June.
According to the BEA, the Q2 drop in current-dollar DPI primarily reflected a decrease in government social benefits related to pandemic relief programs, notably direct economic impact payments to households established by the Coronavirus Response and Relief Supplemental Appropriations Act and the American Rescue Plan Act. Personal saving as a percent of DPI was 10.9 percent in the second quarter, compared with 20.8 percent (revised) in the first quarter.
But perhaps most important was the inflation/PCE data in the report, which revealed that the GDP price index rose 6% in 2Q after rising 4.3% prior quarter, and well above the 5.4% expected, while core PCE q/q rose 6.1% in 2Q after rising 2.7% in the prior quarter, in line with expectations.
The BEA added that prices of goods and services purchased by U.S.residents increased 5.7% in the second quarter after increasing 3.9%. Energy prices increased 20.6% in the second quarter while food prices increased 2.0% •Excluding food and energy, prices increased 5.5% in the second quarter after increasing 3.2% in the first quarter.
Overall, this was a surprisingly poor GDP pring, but it had two silver linings: personal consumption was far stronger than expected as households continued to drain those $2.5 trillion in excess savings; second the drop in inventory means that in the current and future quarters, retailers will have to restock inventories which will of course boost GDP, in other words, today's GDP shortfall will translate into stronger GDP contributions in future quarters.