If the Fed thought its life was complicated before, when it was expected to cut rates even as the US economy was firing on all cylinders and humming along, Powell's problems just hit nightmare level, following a Q2 GDP print that not only came in far stronger than expected, printing at 2.1%, far above the 1.8% consensus expectation...
...but Personal Consumption of 4.3% soared at the highest rate in five years, going back all the way to 2014.
And just in case that wasn't enough, government spending boosted the bottomline Q2 GDP by 0.85%, the biggest contribution to GDP since 2009 as it climbed by a whopping 5%.
But if personal and government spending was the good news, trade was not, as exports subtracted 0.63% from the bottom line, the biggest drop since Q1 2009!
Residential investment was also ugly, dipping for a sixth straight quarter, the longest streak since 2009.
Looking at all the components, the Q2 increase in real GDP reflected increases in consumer spending and government spending, while inventory investment, exports, business investment, and housing investment decreased. Imports, which are a subtraction in the calculation of GDP, increased.
The increase in consumer spending reflected increases in both goods and services that were widespread across major categories. The increase in government spending reflected increases in both federal and state and local government spending. Meanwhile, the decrease in inventory investment reflected decreases in retail trade, manufacturing, and wholesale trade industries. Goods led the decrease in exports.
Here is how we got that 2.1% (or 2.06% to be precise) Q2 GDP Print:
- Q2 Personal Consumption: 2.85%, up from 0.62% in Q1
- Q2 Fixed Investment: -0.14%, down from 0.53%
- Q2 Change in Private Inventories: -0.86%, down from 0.55%
- Q2 Net Exports -0.64%, down from 0.90%
- Q2 Government consumption: 0.85%, up from 0.48%
Or, added across: 2.1%
Commenting on today's report, Bloomberg economists note that "the composition of growth, toward consumer spending and away from investment, will be sufficient to propel GDP modestly above trend. During periods when consumers were carrying more than their usual share, growth in this cycle tended to be slower, averaging 2.0%, compared with periods with more diversified growth, which averaged 2.6%. Bloomberg Economics’ forecast for the second half 2019 GDP growth is 2.1%."
Elsewhere, headline PCE beat while core PCE missed, as prices of goods and services increased 2.2% in the second quarter of 2019, after increasing 0.8 percent in the first quarter. Food prices increased 0.7 percent in the second quarter, while energy prices increased 18.8 percent.
The headline GDP price index rose 2.4%, above the 2.0% expected, however excluding food and energy, the core PCE increased 1.8% in the second quarter, below the 2.0% expected, and compared with an increase of 1.2% in the first quarter. Ironically, as BMO's Ian Lyngen notes, the core-PCE was notably weaker-than-forecast at 1.8% vs. 2.0% expected. "Moreover, Q1's core-PCE was revised down to 1.1%... Our view on the Fed is unchanged as a result of the data and, if anything, skews the path of policy rates lower as lowflation has become so crucial to the easing narrative."
So on one hand you have inflation data that continues to push the Fed increasingly more dovish, on the other you have an overall economy that is clearly not impacted adversely by low inflation with consumption clearly overheating. In this context, Avery Shenfeld at CIBC asks "Do you call that a slowdown? We did have weakness in two key cyclical components of GDP, residential investment and business structures...Overall, the data lean towards our view that we are headed for only a couple of quarter point insurance cuts from the Fed, rather than a major easing cycle."