The US economy expanded at a much brisker pace than expected in the second quarter, the first read on Q2 GDP showed.
The 2.4% pace tipped by the advance estimate breezed past the 1.8% consensus which, frankly, should’ve been higher by Thursday in the US. This was a foregone conclusion.
Invariably, market participants will be subjected to the usual cacophony of skeptical voices explaining why the report wasn’t “actually” strong or why this or that component suggests a US recession is in fact already upon us. Some such narratives will have merit, but most won’t.
The fact is, the US economy didn’t succumb in the first half of 2023 as many expected. Indeed, the labor market and consumers held up just fine. Maybe that’s all about to change, but recent data doesn’t point to an imminent, recessionary deceleration.
The pace of spending did slow in Q2, as expected. The personal consumption print was 1.6%. But that too was better than estimates.
Given the inflation-consumption-policy nexus, it doesn’t get much friendlier than a spending number that’s healthy but also indicative of a downshift from the prior quarter’s untenably strong pace.
Consensus expected 1.2% from the personal consumption reading.
Nonresidential fixed investment rebounded smartly to show a 7.7% increase, the swiftest in over a year. The “final sales to domestic purchasers” line, which macro watchers eye fairly closely, slowed from Q1, but looked good enough. Residential investment was a drag for the ninth straight quarter, but the headwind looks less onerous.
The figure below gives you a sense of the breakdown. In some respects, you could call this one of the best overall reports of the pandemic era.
Note that the contribution from investment in Q2 was the largest in five quarters.
Crucially, the price gauges were cooler than expected. Core PCE was 3.8%, below the expected 4%. That bodes well for Friday’s June PCE data. The deflator printed 2.2%, the lowest of the pandemic era and far below the expected 3%.
Meanwhile, durable goods orders for June topped estimates, and jobless claims registered another downside “surprise,” printing just 221,000 against expectations for 235,000. Continuing claims were also below estimates.
Suffice to say you could scarcely conjure a more favorable set of numbers for the Goldilocks/soft landing narrative if you tried. The US economy is expanding, consumption is steady but cooling, capex is improving, inflation is moderating and the labor market is ready and willing to hire anyone who wants to work.
It won’t be easy spinning Thursday’s data out of the US as bearish. Plenty of people will try, though. And equities’ eventual swoon did suggest that good news could be bad news, even when accompanied by evidence of cooler inflation.
