Macro Focus — Second Quarter GDP

Wed, JUL 30th, 2014

This morning’s second quarter GDP report was strong across the board. The only spots where one could poke holes were inventory (build good for this quarter but could imply a bit of a production pause next quarter, although this cadence is not unusual; recall inventories took from growth by a similar amount in Q1) and trade (imports +11.7% exceeded exports, but increasing imports can be a sign of domestic economic strength). Consumption, investment and even government spending (at the State and local level; Federal spending was down -0.8%) were all tailwinds to growth. Consumption highlights were seen in durable goods spending, which increased +6.2% in part due to a +17.5% increase in motor vehicle & parts spending. Fixed business investment jumped nearly +6%. Despite the pick-up in consumer spending, Americans saved more in Q2. The savings rate jumped to 5.3% from 4.9% in the previous quarter. When balanced against recent Fed-tracked revolving credit data, this implies not only improved household finances but augurs well for future spending.

Inflation – an extremely important metric concerning Fed policy – came in at +2% annualized run-rate up from +1.2% in Q1.

The +4% Q2 print (beating nearly everyone’s expectations including mine @ +3.6%; consensus was at +2.9%) with the revised (upward) -2.1% for Q1 place blended growth for the first half of the year at approximately +1%. And while this is well below the trend during the course of this recovery (approximately +2.1%) as well as below that of the blended average of Q3/Q4 2013 (+4%), it is a better run-rate than previously thought. Moreover, what today’s report demonstrates (along with reams of other endless incoming economic data) is that Q1 was indeed an aberration caused by weather and some various transitory adjustments.

It is important to keep in mind, however, that this is the advanced release for Q2. There will be several more reports potentially revising this number in either direction.

On net, GDP rebounded nicely following the unexpected decline in the first quarter. However, economic growth is still well off the pace from the second half of 2013 and overall GDP gains are tracking well below earlier 2014 predictions due primarily to the Q1 dip. In order for the economy to hit “escape velocity” this year Q3 and Q4 must keep the pace or best what we saw in Q2. While I do not anticipate this will happen, I continue believe that we are running somewhere between +2-3% for the balance of the year.

Finally, while the data-driven policymakers at the Fed are certainly paying attention to today’s BEA report it is unlikely to alter anything they will say this afternoon.

Bottom line: The U.S. economy continues to lumber along with restrained but steady growth.

Jason L. Ware, MBA
Market Strategist, Chief Analyst
Albion Financial Group
(801) 487-3700; (877) 487-6200

About Albion Financial

Established in 1982, Albion Financial Group is an independent, fee-only financial planner and investment manager located in Salt Lake City, Utah.