We now have a fresh, comprehensive read on the state of Donald Trump’s pedal-to-the-metal MAGA economy, which, if the president had his way, would be firing on every possible cylinder thanks to debt-funded fiscal stimulus, aggressive rate cuts and large-scale asset purchases by a captive Fed.
But, back in reality, the fiscal impulse that made 2018 such a banner year for corporate America and insulated the US from the burgeoning downturn abroad is waning. Although the June payrolls report, a hot read on core CPI and a bounce in some factory gauges, all suggest the weakness that came through in May and June may have been temporary, there are lingering questions about the stamina of the longest expansion in US history.
Trump and his economic team continue to insist that the economy can expand at a 3% clip sustainably, but skeptics abound. The first read on Q2 GDP won’t do much to silence those skeptics, but it will help allay fears that a recession is coming down the pike.
The economy expanded at a 2.1% annualized clip in Q2 according to the advance read. That’s well ahead of estimates (1.8%) and much closer to the top end of the range than the bottom (1% to 2.6%).
Personal consumption rose 4.3% for the quarter, up from 1.1% in Q1. Final sales to domestic purchasers increased at the fastest pace in a year. That’s a relief after Q1.
Notably, government spending delivered the largest fillip in 10 years, rising 5%. As Bloomberg notes, “government spending got a boost from a 15.9% surge in federal nondefense expenditures, which contributed the most in two decades to growth [thanks to] delayed compensation for some federal employees after the government shutdown that ended in January”.
There were signs that the trade war is biting. Exports fell 5.2% and imports managed just a 0.1% gain.
Notably, core PCE rose 1.8%, after just 1.1% in Q1, potentially watering down the “subdued inflation” excuse when it comes to cutting rates. Still, the Fed (and Trump’s economic advisors) can argue that inflation is below target. 1.8% was actually below estimates, so that helps too.
Nonresidential investment dropped 0.6%. That is the first decline since early 2016.
Nothing in this release looks like it has the potential to affect the Fed’s outlook one way or another. It’s a mixed bag, on a quick read. Weakness in trade and business investment probably helps make the case for a 25bp cut, but that was a foregone conclusion. On the whole, the report appears to reduce further the odds of a 50bp move.
And the punchline: Trump’s 3% growth “miracle” was wiped off the board. The updated figures show GDP expanded 2.5% on a Q4-over-Q4 basis last year.