Second-quarter GDP increased 2.6 percent, a tenth of a percentage point more than expected, according to Bloomberg. First-quarter growth, however, was revised down from 1.4 percent to 1.2 percent. Thus, activity in the first half of the year averaged just 1.9 percent, relative to a 2.3-percent pace in the back half of 2016.
While positive, a sub-2-percent reading across the first six months of 2017 is hardly the anticipated strength the Fed has been waiting for to clearly justify the latest path of monetary policy. Still, keeping a glass half full perspective, after a slow start out of the gate, even a modest pickup is a welcome step in the right direction for the U.S. economy.
{mosads}The improvement in activity from April to June was primarily driven by the consumer, with personal consumption rising at a 2.8-percent pace in Q2, a two-quarter high. Goods consumption alone increased at a near 5-percent pace. In other words, after months of minimal activity, U.S. consumers were back out in the marketplace buying summer dresses and big screen TVs.
Stripping out inventories, fixed investment, on the other hand, rose a muted 2.2 percent in Q2, a two-quarter low. Structures and intellectual property investment remained in positive territory, albeit at a notably slower growth rate relative to the first quarter, while equipment investment nearly doubled in the second quarter, up 8.2 percent.
On the trade side, exports gained 4.1 percent in Q2, led by a 6.5-percent increase in service exports. Imports, meanwhile, rose 2.1 percent in the second quarter, about half the pace at the start of the year, with goods imports slowing to a 2.0-percent pace.
Finally, government consumption added just over a 10th of a percentage point to top-line growth with modest activity. Federal spending rose over 2 percent, thanks to a surge in national defense. This nearly offset the decline in federal expenditures the quarter prior. State and local sending fell 0.2 percent in Q2, the third quarter of decline in the past six.
The bottom line is this: Second-quarter growth improved markedly after a weak start to the year, led by an improvement in consumer activity. After lying dormant January-March, U.S. consumers appear to have loosened their purse strings with the start of spring. The pickup in expenditures, however, is more likely driven by pent-up demand as opposed to a reflection of much improved economic conditions, as market wages remain modest and indications of pro-growth policies out of Washington resulting in more money in consumers’ pockets remain a political hypothetical, at least at this point.
Furthermore, business investment, which kept the economy afloat at the start of the year, has dwindled, signaling business confidence in a new-era of policy has begun to wane. Rotating improvement between the U.S. consumer and corporate spending will aid in perpetuating a pace of activity akin to treading water, but a simultaneous rise in both will be needed to meet the Fed’s — and the president’s — expectations of a sizable and sustainable improving trend in the underlying economy.
US gross domestic product rises 2.6 in second-quarter from CNBC.
From the Fed’s perspective, growth improved in the second quarter, period. Never mind the combined still-moderate average across the first six months or the slowdown in corporate investment. The takeaway, at least for the hawks, will be a continued rise in activity, further justifying not only earlier rate hikes in March and June, but likely an additional increase in the remaining five months of the year.
Going forward, without meaningful change to pull businesses back into the market or sizable improvement in labor market conditions and opportunities to sustain the consumer, Q3 may bring waning trends in both corporate and personal spending patterns, undermining the Fed’s plans to move ahead with a further reduction in accommodation.
With this week’s FOMC statement and Yellen’s testimony earlier this month, the Fed has been hard at work selling their message of “temporary” weakness along the monetary policy trail, attempting to convince market participants that their latest slew of rate hikes was in fact the appropriate policy in anticipation of firmer economic conditions to come.
The problem is the economy doesn’t seem to be listening or cooperating with Fed officials’ more optimistic message. Instead, the U.S. economy continues to tread water, warranting not only an assessment of “moderate” at best but also justifying further and sustained accommodative policy rather than a removal of such.
GDP of 2.6 percent is a step in the right direction from a more lackluster growth rate of 1.2 percent at the start of the year, yet an average growth rate of 1.9 percent across the first half of the year is hardly impressive, nor is it suggestive of sizable improvement to come as we look out to the latter half of 2017.
It’s almost as if the economy is giving the Fed the proverbial middle finger (or for those that prefer a gentler economic personification, sticking out its tongue) saying, “Temporary nothing, lackluster is here to stay.”
Lindsey Piegza, Ph.D., is the chief economist for Stifel Fixed Income. She has had her research published in Harvard Business Review and in textbooks for Northwestern University’s Kellogg Graduate School of Management. She’s a regular guest on CNBC, Bloomberg, Fox News and CNN.
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