2nd Quarter GDP Figures
The U.S. Economy grew 1.2% for the Second Quarter 2016, according to the initial estimate of Gross Domestic Product (GDP) from the U.S. Department of Commerce. Estimates from Wall Street economists ranged from 1.0%-3.2%, with the median forecast coming in around 2.5%. Despite continued strength in consumer spending, a slowdown in business spending and investment weighed on growth for Q2. In addition, the GDP figure for Q1 was revised down from 1.1% to 0.8%. Given that the economy has now grown at less than a 2.0% pace for three straight quarters, does this signal a more sustained slowdown in the U.S. economy or is this temporary?
Personal consumption, a broad measure of consumer spending, had its best quarterly gain since the end of 2014. In addition, consumption figures for Q1 were revised higher. Although this accounts for approximately 70% of economic output, it was not enough to offset the reduction in inventories and corporate spending. Businesses cut back on spending and reduced inventories amid weak global markets in the first half of the year and uncertainty leading up to the Brexit vote, as well as lingering effects from a strong dollar to start the year. Federal Reserve officials, who earlier in the week stated risks to the U.S. economy have diminished, may continue holding rates steady to make sure the economy is strong enough to absorb higher interest rates later this year.
Still, leaner inventories could set up an increase in production later this year if consumer spending continues to strengthen. Next week’s jobs report will provide more clues as to whether wage growth will continue, which is supportive of consumer spending. Furthermore, inventory data tends to be one of the more volatile components of GDP. In fact, real GDP (excluding inventories, trade and government spending) grew at a 2.7% annual pace in Q2. In addition, annual revisions released today showed the economy expanded 2.6% from 2014 to 2015, which was the best yearly gain since 2006. Therefore, we believe the weak GDP figure for the quarter is temporary.
We will continue to monitor economic data, and next week’s jobs report will provide more clues as to the overall health of the labor market. Also, despite coming in below expectations, the 1.2% figure is an initial estimate and there are two more revisions to Q2 GDP by the end of September. Consequently, this estimate has not altered our expectations for a pace of steady economic growth as we head into the second half of 2016.