Friday, July 27, 2018

My Two Cents On Today's GDP Number

We said the other day:
"....we expect this week’s Q2 U.S. GDP report to come in at the high-end of expectations, and, thus, there’ll be the attendant “we-told-you-sos” and “see-we-know-what-we’re-doings” coming from White House officials – which, by the way, would be deserved self-pats on the back, given the justifiable optimism spawned over tax cuts and deregulation!
Our warning herein being that while such celebratory (possibly 4%+) growth, were it completely unhindered, would be difficult enough for an advanced economy to sustain over the long run, add in a global trade war and we can say with confidence that, ultimately – should the TW become a protracted affair – we’ll see the GDP number decline precipitously off of whatever Q2 delivers. It’s also fair to say that Q2’s results will reflect a pulling forward of activity, as companies rushed to get business done at the more favorable terms that existed before the unfortunate imposition of tariffs coming and going; a phenomenon that by itself sets us up for a marked letdown in future quarters."

Here's Econoday breaking down the numbers this morning, with my two cents interjected in blue along the way: 

GDP Released On 7/27/2018 8:30:00 AM For Q2(a):18

                                                       Prior Revised   Consensus   Consensus Range   Actual
Real GDP - Q/Q change -              2.2%                 4.2%           3.0% to 4.8%          4.1%
GDP price index - Q/Q change -    2.0%                 2.2%           1.5% to 2.5%          3.0%
Real Cons Spending – Q/Q chge   0.5%                 2.9%           2.3% to 3.2%          4.0%

Leading a report that speaks to the risk of overheating, consumer spending drove GDP significantly higher in the second quarter, to a 4.1 percent annualized rate which, however, just misses Econoday's consensus for 4.2 percent. Consumer spending rose at a very strong 4.0 percent rate in the quarter to contribute 2.7 points of the total rate with spending on services contributing 1.5 points. Spending on goods, split roughly evenly between durables and nondurables, contributed 0.6 points.
The U.S. consumer is in very good shape!
Net exports were the next biggest contributor, adding 1.1 points and reflecting strong improvement in exports that offset a slight increase in imports. Nonresidential fixed investment contributed 1.0 point to the quarter led by structures and intellectual property with equipment only slightly positive. Government purchases were also a positive contributor at 0.4 points.
Again, net exports' big contribution has much to do with a stockpiling ahead of U.S. tariffs. Happened big time with soy beans, for example.
Capex remains solid enough.

Government spending -- and therefore the issue of government debt -- is on the rise. Let's hope it's put to good use.
Inventories are another major story in this report, falling $27.9 billion for a 1.0 point subtraction from GDP. When excluding inventories (final sales), GDP came in at 5.1 percent. And the pull lower from inventories is actually a positive for the economy, as inventories are too low and need to be rebuilt which should be a positive for third-quarter GDP. Residential investment proved only marginally negative in the second quarter.
Inventories will replenish and "should be a positive for third-quarter GDP." However, further escalation in trade tensions would dampen business sentiment and lead to caution on all fronts. Business surveys suggest it's already doing a real number on capex (business expansion).
To top this very strong report off are price pressures as the GDP price index came in at a very hot 3.0 percent, vs 2.0 percent in the first quarter and exceeding Econoday's consensus range by 5 tenths. And the core, which excludes food and also energy prices which have been high, shows similar pressure, at 2.7 percent vs the first quarter's 2.4 percent.
Again, add tariffs to the mix (already in the mix, actually) and you have a real inflation problem. Worse yet, add tariffs to the mix and you have a potential stagflation (stagnant economy with inflation) problem. I.e., no way we maintain anything remotely near 4% growth in a trade war scenario (highly unlikely even without such a scenario), and prices continue to rise due to tariffs!
Overheating would appear to be a danger for the economy right now, consistent with the array of regional and private economic data where delivery delays, input costs and even price pass through are at or near record highs. Today's report includes benchmark revisions including a 2 tenths upgrade to first-quarter GDP which now stands 2.2 percent. Also of note, the savings rate for 2017 is revised much higher to 6.7 percent from 3.4 percent.
Don't let anybody convince you that the Fed should not be raising rates in the current environment!

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