Orlando's Outlook: Growth no worse than expected
Bottom line The Commerce Department reported this morning that U.S. economic growth is not materially weaker than expected, sparking a powerful sigh-of-relief rally among equity investors. The advanced report for second-quarter Gross Domestic Product (GDP) of 1.5% was actually a tick stronger than consensus and right in line with our own estimate here at Federated. True, growth has slowed considerably from the upwardly revised levels of 4.1% in the fourth quarter of 2011 and 2.0% in this year’s first quarter, consistent with our temporary economic soft-patch thesis. Importantly, the government typically revises three years of historical data at this time every year, and this year’s revisions essentially netted out. Last year, in contrast, the government went all the way back to 2003 and revised its quarterly GDP data lower, demonstrating that the Great Recession was even deeper and more painful at its trough than we had previously thought. We continue to believe that second-half GDP will be more robust than first-half growth, as the economy rebounds from its temporary soft patch. As such, we do not expect any major monetary policy pronouncements from the Federal Reserve at next week’s Federal Open Market Committee (FOMC) meeting. Rather, we expect the Fed to patiently collect data from the upcoming July and August employment reports, and potentially adjust policy as warranted at its mid-September FOMC meeting.
The following table reflects the Commerce Department’s quarterly and full-year GDP revisions:
New GDP revisions
|Quarter||Previous GDP||Revised GDP|
|Full year '09||-3.5%||-3.1%|
|Full year '10||3.0%||2.4%|
|Full year '11||1.7%||1.8%|
Here are the key details regarding today’s second-quarter GDP flash report:
Consumer spending softened Personal consumption expenditures, which account for 70% of GDP, rose by only 1.5% in the second quarter, which was the slowest such pace in a year and contributed 1.05 percentage points to quarterly growth. This compared with a solid 2.4% gain in consumer spending in the first quarter and a 2.0% increase in the fourth quarter of 2011. This second-quarter weakness was not unexpected, due to negative retail-sales results during April, May and June—the longest period of decline since 2008, largely due to the poor labor reports those months and the commensurate decline in consumer confidence and sentiment. In addition, auto sales declined in March, April and May, because of the lagged impact from the spike in energy prices from last October into March. But with energy prices and interest rates now lower, higher stock prices fueling a wealth effect, and initial weekly jobless claims working back towards a four-year low of 350,000 in two of the past three weeks, we believe that consumers will return to the stores for the important Back-to-School retail season, whose results should rebound from depressed but relatively unimportant summer levels. The savings rate rose in the second quarter to 4.0% from 3.6% in the first quarter, as income gains outpaced consumption, which could serve to spark stronger second-half spending, if consumers begin to feel more confident about the economy.
Housing remains positive Residential investment rose by 9.7% in the second quarter, compared with a robust surge of 20.5% in the first quarter, 12.1% in last year’s fourth quarter, and only 1.4% in the third quarter. As we discussed in a recent Market Commentary, we believe that the housing industry has already hit bottom, and its pace of recovery is tied to the improvement we experience in the labor market.
Capex slower Real business fixed investment rose by 5.3% in the second quarter, compared with a gains of 7.5% in the first quarter, 9.5% in last year’s fourth quarter, and 19.0% in the third quarter. Business equipment and software spending rose by 7.2% in the second quarter, compared with a first-quarter gain of 5.4%, and increases of 8.8% in the fourth quarter of 2011 and 18.3% in the third quarter. Business structure investment—such as factories and office buildings—was barely positive at a gain of 0.9% in the second quarter, compared with a 12.9% increase in the first quarter, an 11.5% gain in last year’s fourth quarter, and a booming 20.7% leap in the third quarter. Last year’s robust gains were likely due to the accelerated depreciation component of the tax code, which expired at year end, while this year’s tepid increases are due to business uncertainty about the prospect of higher taxes and more government regulations in an election year.
Trade stable The stronger dollar versus the euro and weaker overseas economies conspired to subtract 0.3 percentage points from second-quarter growth due to a wider trade gap. Exports still increased by a solid 5.3% in second quarter, compared with gains of 4.4% and 1.4%, respectively, during the first quarter of 2012 and the fourth quarter of 2011. But import gains outstripped the rise in exports, with an increase of 6.0% in the second quarter—likely due to lower imported energy prices—compared with a 3.1% increase in the first quarter and a 4.9% gain in last year’s fourth quarter.
Slight inventory rebuild The pace of inventory restocking improved to $66.3 billion in the second quarter, which added a modest 0.3 percentage points to quarterly GDP growth, compared with $56.9 billion in the first quarter and $70.5 billion in last year’s fourth quarter. Businesses need to see stronger end-market demand to increase their inventories further.
Government spending declines yet again Total government spending fell for the eighth consecutive period by 1.4% in the second quarter, compared with sharper declines of 3.0% in the first quarter, by 2.2% in last year’s fourth quarter, and by 2.9% in the third quarter. State and local spending fell by 2.1% in the second quarter—marking their eleventh consecutive quarterly decline—while federal government spending slipped by 0.4%.