Final Q2 GDP Surges 4.6% Thanks To Profit Definition Change; Personal Consumption Weaker Than Expected

The good news in the just released final Q2 GDP estimate soared by 4.6%, just as Wall Street expected, which was the biggest quarterly jump since 2011 Q4 2011, driven by gains in business spending, where mandatory forced Obamacare outlays led to a $17.5 billion chained-dollars increase in Healthcare spending to $1815.9 billion. Nonresidential fixed investment contributed two-tenths to the revision, net exports contributed one-tenth, and consumer spending contributed one-tenth. Also helping were corporate profits which rose 8.4% in Q2, the most since Q3 2010, once again courtesy of adjustment in definitions (recall the IVA vs CCAdj change we discussed previously). 

From the report: "Profits from current production (corporate profits with inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj)) increased $164.1 billion in the second quarter, in contrast to a decrease of $201.7 billion in the first." For the explanation read "Is This The Top? First Quarter Corporate Profits Tumble Most Since Lehman." The definition change was responsible for a drop in Q1 profits which has now shot right back up. This is what Goldman said back then:

The decline was driven by statistical adjustment factors. The first reason is that the decline in corporate profits as measured in the national accounts mostly reflects the capital consumption adjustment factor estimated by the BEA to account for the effect of the expiration of bonus depreciation at the end of 2013.


Q1 weakness should be temporary. Growth and productivity were unusually weak in Q1, which likely weighed on profits, but both should strengthen going forward. As we argued recently, Q1 weakness was mostly driven by temporary factors, while more recent data suggest that the acceleration is intact.

Visually, this is how it all came down:

Obviously, this bounce was a much needed rebound from the -2.1% drop reported in Q1 due to "harsh weather", yet one wonders what new and improved changes in definitions and/or mandatory government wealth redistribution programs the BEA will reveal in coming quarter to keep the pro-forma economic growth steady.

The bad news is that, once again, the much anticipated US consumer renaissance, has been delayed, with Personal Consumption, which was supposed to rise 2.9%, instead printed at a final number of 2.5%. In fact the 1.75% (as a percentage of the final total 4.6% Q2 annualized increase) was barely above the 1.5% average from the LTM period as of Q1.

So with Q2 in the books, and with both Obamacare, and the profit definition kitchen sinks already thrown in, we sit back and look forward to how the upcoming "harsh winter" crushes Q1 GDP once again, because the New Normal may be different, but snow sure rhymes.


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