Not only did real GDP come in on the low side, below nearly all consensus estimates, but first quarter GDP was revised lower to 0.8% from 1.1%.
Factoring in the downward revision, my second quarter guess of 0.8% was extremely close. For details please see GDP Forecast Roundup: GDPNow, Nowcast, Econoday, Goldman, Markit, ZeroHedge, Mish.
Bloomberg Spins This Mess Positive
The Bloomberg Econoday consensus estimate was 2.6% in a range of 2.2% to 3.4%.
Despite the huge miss compared to expectations, Bloomberg Econoday managed to put a positive spin on this mess.
Second-quarter GDP looks very weak at only a plus 1.2 percent annualized rate, but the details are positive. The biggest positive is consumer spending where growth, showing strength across readings, came in at a stellar 4.2 percent rate, more than double the first-quarter’s 1.6 percent rate.
A plus for the economy but a big negative in this report is slowing inventory accumulation which pulled down GDP by 1.2 percentage points in the quarter. But lean inventories point ahead to new accumulation which is a plus for future production and employment.
Another negative in the report is a reversal in residential investment, which had been running in the double-digit zone but which fell at an annualized 6.1 percent to pull down GDP in the second quarter by 2 tenths. A central concern remains nonresidential fixed investment, falling at a 2.2 percent rate and pulling down GDP by 3 tenths in the quarter. Weakness here points to weakness in business confidence and trouble ahead for productivity growth.
The first estimate for second-quarter GDP is expected to come in at plus 2.6 percent for a sizable gain from first quarter growth of 1.1 percent which was held down by severe weakness in nonresidential fixed investment. Retail sales rose sharply in the second quarter and are expected to feed strong gains for the consumer spending component, offsetting what is expected to be continued weakness in business investment, slowing in residential investment, and slowing in inventory accumulation. The GDP price index, reflecting energy prices, is expected to accelerate sharply, to plus 1.8 percent from 0.4 percent in the first quarter.
The inventory-to-sales numbers remain in the stratosphere so it is beyond absurd to spin inventories as a huge positive.
On July 12, Bloomberg noted the “success” in inventory reduction. Here is a chart of that “success”.
Overall Inventory-to-Sales Ratio
For more details and three more inventory-to-sales charts, please see Wholesale Trade: Inventory-to-Sales Ratios Extremely Elevated.
This Econoday writer is a real “gem”.
Three Consecutive Quarters of Weak GDP
The last three quarters are 0.9%, 0.8%, 1.2%.
Real GDP Historic Trend
Real GDP Compounded Rate of Change
The preceding two charts courtesy of Doug Short Q2 GDP Advance Estimate: A Major Downside Surprise.
As posted yesterday …
- GDPNow 1.8%: July 28 GDPNow Forecast Sinks to 1.8% Following Advance Economic Indicators Reports
- FRBNY Nowcast 2.2%: July 15 GDPNow and Nowcast Forecasts Tick Up 0.1 Percent; Diving Into Interesting Details. The NY Fed had a blackout due to the FOMC meeting. It normally reports on Friday so its report is stale. I am confident its report would have been lower today had it made an update.
- Goldman Sachs 2.4%: Zerohedge tweeted earlier to day that Goldman lowered its forecast today from 2.6% to 2.4%.
- Bloomberg Econoday Survey 2.6%: The Bloomberg Econoday consensus estimate is 2.6% in a range of 2.2% to 3.4%.
- Wall Street Journal Survey 2.6%: July 28 – Gross domestic product, a broad measure of economic output, is projected to have advanced at a 2.6% annualized pace this spring, according to economists surveyed by The Wall Street Journal. The economy grew at 1.1% in the first three months of the year.
- Markit Chief Economist 1.0%: July 6 is the latest I could find from Markit chief economist Chris Williamson as noted in PMI Services Essentially Flat, Non-Manufacturing ISM Jumps Huge
- ZeroHedge 2%: I emailed ZeroHedge this morning to see if he had a guess. He does. It’s 2%.
- Steen Jakobsen, chief economist and CIO Saxo Bank 1.6%
- Mish: 0.8%
Straight up, Chris Williamson comes closest. Factoring in the downward revision, it’s closer to a tie between Williamson and me.
Should consumer spending falter for any reason, we will be looking at zero or negative GDP numbers.
Mike “Mish” Shedlock