Growth stronger than expected
Bottom line GDP grew at a stronger-than-expected annualized pace of 2.1% in the second quarter of 2019, compared with an unrevised gain of 3.1% in the first quarter, helping to drive stocks today to a new record high. GDP in the U.S. is now slightly more than $21.3 trillion in current dollars.
While today’s report was slightly below our 2.3% forecast here at Federated, it was well above both the Bloomberg and Blue Chip consensus estimates of 1.8% and the Atlanta Fed’s GDPNow estimate of 1.6%.
Why the beat? On the strength of strong retail sales over the past four months, personal consumption was more robust than the consensus believed. Also, we had the largest boost from government spending in a decade. These helped to fuel today’s solid report. There were some drags, however. They include a decline in exports due to the ongoing China trade discussions, a slower pace of inventory accumulation, a continued soft housing market and weak corporate spending.
The Department of Commerce issued its annual benchmark revisions today, dating back to 2014. While they made several quarterly tweaks, the only full-year change to GDP was to increase growth in 2017 from 2.2% to 2.4%. They also revised the personal savings rate higher to 7.7% in 2018 from 6.7%.
Importantly, the U.S. economy has now grown at a 2.7% average annualized pace over President Trump’s first nine quarters in office, compared with a 2% rate of growth for President Obama’s last nine quarters in office. So Trump’s fiscal policy changes appear to be working.
Here are the key details regarding today’s second-quarter GDP flash report
Final sales surge Private domestic final sales, which exclude volatile net trade, inventory building and government spending, rose by a strong 3.2% pace. That is double the first quarter’s muted 1.6% growth rate, the slowest in four years. This metric is an excellent indication of fundamental demand, and suggests the economy has successfully navigated the winter soft patch.
Consumer spending soars Personal consumption expenditures, which account for 70% of GDP, rose by a stronger-than-expected 4.3% (versus an estimated 4% gain), compared with 1.1% in the first quarter. That added 2.85 percentage points to overall second-quarter growth versus a tepid 0.78 in the first quarter. Retail sales were on a tear from March through June, reversing the worst Christmas in nearly 20 years and the Frugal February phenomenon, which dragged sales into negative territory during both months. But Easter sales soared during “Mapril,” a trend we expect to continue during the important Back-to-School (BTS) season.
Government spending strong Total government spending, which accounts for about 17.5% of GDP, rose 5%, compared with a 2.9% gain in the first quarter, adding 0.85 percentage points to growth, its largest contribution in a decade. Federal government spending rose 7.9% in the second quarter (paced by a 15.9% surge in nondefense spending), while state and local spending rose 3.2%.
Housing remains weak Residential construction fell for the sixth consecutive quarter and for the eighth time in the past nine quarters, declining 1.5%, which subtracted 0.06 percentage points from growth versus a 1% decline in the first quarter. Despite the recent lower interest rates, the housing market remains under pressure. Among the reasons are the $10,000 SALT deduction cap impacting high-tax states, elevated home prices, rising labor and material costs, and more than $1.6 trillion in student loan debt impacting millennial first-time home buyers. The second quarter’s typical peak selling season never got into gear this year.
Net trade under pressure The deterioration in net trade largely due to the ongoing trade skirmish with China subtracted 0.65 percentage points from growth. Exports declined 5.2% in the second quarter versus a 4.1% first-quarter increase, which subtracted 0.63 percentage points. Imports rose marginally by 0.1% in the second quarter versus a 1.5% decline in the first quarter, which subtracted 0.01 percentage point from growth. The eventual completion of a U.S.-China trade deal, perhaps by year-end, could reverse this negative trend, boosting net trade’s contribution.
Pace of inventory growth slows Inventory restocking rose by a more modest $71.7 billion, which reduced growth by 0.86 percentage points, compared with an aggressive inventory build of $116.0 billion in the first quarter, which had added a robust 0.53 percentage points. With an average inventory build of nearly $100 billion in each of the last three quarters, we were expecting a more modest pace this quarter, which would pressure overall growth.
Business fixed investment slips Nonresidential real business fixed investment declined for the first time since 2015, slipping 0.6% and subtracting 0.08 percentage points from GDP growth, as uncertainty concerning the China trade war is weighing on the minds of corporate planners. That compares with a first-quarter increase of 4.4%, which added 0.60 percentage points. Looking at the three key subcomponents, nonresidential structures declined for the third time in four quarters, plunging 10.6% in the second quarter versus a 4.4% first-quarter increase, which subtracted 0.34 percentage points. Business equipment rebounded after a small first-quarter decline, rising 0.7% in the first quarter (and adding 0.04 percentage points) versus a modest 0.01% first-quarter decline. Intellectual property was the capex star, rising 4.7% in the second quarter (adding 0.22 percentage points) versus a stronger 10.8% gain in the first quarter.