The US economy expanded at a much brisker pace than expected in Q2, according to the first estimate of GDP, released on Thursday.
Growth ran at a 2.8% annualized rate last quarter, the BEA said. The collective “wisdom” of economists reckoned the headline at 2%.
This is, of course, just the first of what’ll eventually be three estimates, so take it with a grain of salt. But as things stand, markets and policymakers are staring at a meaningful re-acceleration versus Q1’s pace.
First quarter growth, you’re reminded, was the most tepid since the US economy met the “technical” definition of a recession (which is meaningless for the purposes of “official” recession dating) in 2022.
The upside surprise for Q2 comes at a somewhat awkward juncture for the Fed. Jerome Powell and co. are keenly aware that “you can’t get fooled again,” to employ George W. Bush’s butchered version of the old adage that cautions against credulity. Calls for easing are getting louder, but the Committee wants to be sure. Sure that inflation isn’t going to pick back up after successive favorable CPI and PCE price updates. Thursday’s GDP readout argued against rushing into rate cuts.
As you might expect given the headline beat, personal consumption was more robust than economists predicted in Q2. The 2.3% pace was a marked pickup versus Q1, and easily topped the 2% consensus call.
The upside’s not all that surprising. After all, control group retail sales were much brisker than expected in June and nominal spending was revised higher in that release for the prior months. Reports of the American consumer’s demise were greatly exaggerated, as I put it.
In addition to the advance read for Q2, the figure (above) shows how the personal consumption component was revised over the course of Q1’s three estimates. The spending impulse was marked down twice, hitting 1.5% in the final reading. That’s the context for the apparent re-acceleration in the April-June period.
Given all of the above, it won’t surprise you to learn that the quarterly annualized core PCE print was warmer than expected, at 2.9%. That’s a step down from Q1’s disconcerting 3.7%, but economists were looking for 2.7%.
The deflator printed 2.3%, lower than expected and down from 3.1% in Q1.
Elsewhere in the release, business spending was solid at 5.2%, residential investment contracted for the first time in a year and the key final sales to private domestic purchasers line showed a 2.6% advance for the second straight quarter.
The figure below shows the GDP breakdown by contributor.
Personal consumption and inventories were the biggest contributors. Only trade was a drag.
Markets probably won’t fret too much about the upside prints on the GDP headline, personal consumption and core price growth. There was nothing in the release to shift the Fed narrative dramatically. The September SEP meeting’s very likely to be a cut.
But if there was any chance of a shock cut next week (i.e., the cut Bill Dudley swears is necessary and justified), the GDP release should snuff it out.
