Today’s GDP Report & Revisions Were A Disappointment

This morning’s advance estimate of 2Q Gross Domestic Product came in a little lower than most analysts expected. The Commerce Department reported that 2Q GDP rose 2.3% (annual rate), a little lower than the pre-report consensus of 2.7%. The annual GDP revisions going back three years were also below the pre-report expectations.

Before I get into my analysis of today’s GDP numbers, let me briefly comment on the latest Fed policy meeting which concluded yesterday. When I say briefly, I mean briefly: nothing new; no interest rate hike; and no hint when “lift-off” might occur. Except for a few select word changes, the Fed’s policy statement was nearly identical to the previous one on June 17.

It remains to be seen if the Fed Funds rate will be raised at the September 16-17 meeting, as most analysts continue to expect. Interestingly, more and more Fed-watchers are calling on the central bank to delay any increase in the key lending rate until sometime next year, despite Chair Yellen’s recent hawkish rhetoric about needing to raise the rate this year.

Back to today’s GDP report. As I discussed at length in Tuesday’s E-Letter, there was a lot of optimistic anticipation ahead of this morning’s GDP report and the annual revisions to same going back three years. All of the numbers released today were based on a new method of calculating GDP that is supposed to smooth-out the “seasonality.”

While the 2.3% rate in the 2Q was a disappointment for those who expected a jump to 3.0-3.5%, it was in-line with the Atlanta Fed’s “GDPNow” reading of 2.4%, which is gaining credibility as a measurement of the overall economy. Yet there was at least some good news in the annual GDP revisions going back to 2012, but not nearly as much as was anticipated.

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As expected, the government’s Bureau of Economic Analysis (BEA) revised 1Q GDP upward from -0.2% reported last month to +0.6% – still not very impressive. The latest figures repeat a common pattern in recent years: a slump at the start of the year, followed by a bounce back in the spring and summer.

Among the good news, today’s report showed that consumer spending, which accounts for more than two-thirds of economic output, rose 2.9% in the 2Q, compared with a 2.1% increase in the first three months of the year. Overall consumer spending has been choppy, suggesting some Americans remain cautious about opening their wallets despite encouraging job gains this spring and slowly accelerating wages.

Yet there also are signs consumers may be starting to spend some of the windfall they received from months of lower gasoline prices. The savings rate fell in the 2Q, to 4.8% from 5.2%, as Americans spent more on long-lasting products, including cars and durable goods. Government spending also rose 0.8% in the 2Q versus a decline of 0.1% in the 1Q.

Today’s report also showed the housing market provided a boost to the economy in the 2Q, amid signs of strong activity during the spring selling season. Residential investment advanced at a solid 6.5% pace. However, that gain comes after the last two quarters of at least 10% growth.  So much for the good news.

Business spending, another key driver of the economy, remained soft in the 2Q and actually dragged down the overall GDP number for the first time since the 3Q of 2012. Non-residential fixed investment – reflecting spending on software, research and development, equipment and structures – retreated at a -0.6% rate, compared with a 1.6% growth rate in the 1Q. Business inventories, which were expected to have risen in the 2Q, actually fell -0.8%.

Next, the price index for gross domestic purchases rose at a 1.4% annual pace in the 2Q, down from 1.8% in the 1Q. Core prices which exclude food and energy costs rose 0.2%. Consumer spending increased 2.9% in the 2Q, up from 1.8% in the first.

Finally, the revisions to GDP going back three years were decidedly disappointing. The economic expansion over the past three years was weaker than initially projected. From the end of 2011 to the end of 2014, the economy expanded at a 2.1% annualized rate, compared to the 2.4% pace reported previously.

All in all, today’s advance estimate of 2Q GDP was positive but not as strong as expected. More importantly, the revisions to GDP going back three years were well below expectations.

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