Highlights:
- US Q2 GDP growth matched consensus, picking up to an annualized 2.6% pace from Q1’s 1.2% gain.
- Final domestic demand growth held steady at 2.4% in Q2.
- Consumer spending growth rebounded to 2.8% from 1.9%. The Q1 increase was revised up from 1.1%, which looked surprisingly weak given aggregate income gains and strong consumer sentiment.
- Nonresidential investment maintained momentum with a 5.2% gain in Q2 building on the previous quarter’s 7.1% gain.
- Stronger business investment was broadly-based though the increase in structures was due to a further surge in mining exploration.
- Residential investment slipped back following a double-digit gain in Q1. Some housing activity may have been brought forward by unseasonably warm winter weather.
- Net exports added to growth for a second consecutive quarter, reflecting solid export gains year-to-date.
Our Take:
It would be easy to say the US economy got its groove back in Q2 with GDP growth jumping to 2.6% following Q1’s sub-trend 1.2% gain. However, revisions show much of that slowing can be attributed to weaker inventory investment. Underlying demand never really lost its mojo with final sales to domestic purchasers rising 2.4% in each of the last two quarters. The previously-reported slowdown in Q1 consumer spending has been lessened to 1.9% through revisions with Q2’s growth rate rebounding to 2.8% and thus more consistent with solid employment gains to date this year. Another solid increase in business investment was also encouraging, coming from both rebounding oil and gas capex and spending by non-energy firms. We don’t think the Fed will be surprised by today’s data; they’ve been anticipating a Q2 rebound for some time now and have consistently pointed to strength in consumer spending and business investment. But confirmation of a solid increase is heartening, particularly in the face of slowing inflation in recent months. The return to above-trend growth points to remaining economic slack being absorbed, which should begin to put upward pressure on prices and help return inflation to their 2% objective. As such, we continue to expect another rate increase before year end, to which markets are only attaching 50/50 odds at present.
