GDP Growth in the Second Quarter Plus Revisions – And Slim Just Left Town

The Bureau of Economic Analysis (BEA) released the advance estimate of real GDP growth for the second quarter of 2016 plus revised estimates back to 2013. Real GDP grew at a 1.2% seasonally adjusted annual rate in the second quarter and was modestly higher overall in 2015, but the slowdown as the year unfolded was more pronounced than initially estimated, including the first quarter of 2016.

Today’s GDP report has some positives, some negatives, and some negatives that may not be as bad as they look. The positives: personal consumption expenditures (PCE) rebounded from a weak first quarter, exports rose and imports declined. This is important because PCE has been a pillar of the modest growth we’ve seen, and the strong US dollar has made next exports a drag on growth in recent quarters.

The negatives: business investment (fixed nonresidential investment) declined, mostly but not exclusively the energy sector, and government spending, federal as well as state and local was a drag on growth.

The less worrisome negatives: residential fixed investment (home building) and inventory investment. Residential fixed investment (RFI) declined in the second quarter but that can be traced to a modest slowdown in single family housing starts compared to an outsized pace in the first quarter. RFI should return to strong growth and positive contributions next quarter. The change in business inventories was negative and shaved 1.16 percentage points from overall GDP growth. This is bad for this quarter but sets the stage for growth in coming quarters as businesses rebuild rather than deplete inventories.

Overall, the report is mixed. GDP growth was weak but moving up from recent quarters, with signs of strength but also soft spots. Early indications of the rebound in PCE were clear but the overall weakness of growth was unexpected. Based on the unexpected weakness in this quarter and the increased shallowness of recent growth shown in the revisions, analysts are likely to mark down forecasts for overall 2016 growth. And the lower trajectory of growth is likely to have an impact at the Federal Reserve with respect to deliberations over the fundamental strength of the economy and the timing of the next interest rate increase. With caution as the rule at the Fed today’s report probably pushes the odds of a September rate increase somewhere between slim and none.

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