U.S. Outlook: Q2 GDP data show slowdown developing
The devil is in the details of the second-quarter GDP data released today.
In a nutshell, the initial estimate of second-quarter GDP provides no new insights on the U.S. economy. It neither alters our near-term nor long-term U.S. economic and interest rate outlook.
The advance estimate of second-quarter GDP growth is higher than the consensus forecast, coming in at 2.1% annualized compared with expectations of 1.8%. However, it is only a smidge higher than our 2.0% forecast and the details of the report are very close to our prior expectations.A U.S. economy Rorschach test
In short, the U.S. economy remains a bit of a Rorschach test. Looking at the business investment and international trade components of this second-quarter GDP report, you would probably conclude the U.S. economy was already in recession or in deep danger of entering one. However, looking at the consumer and government spending components, one would likely conclude the opposite: stable growth built on a solid foundation of generous consumer and government spending.
So, what message should we take away from this report?
It helps to take a step back for a moment and place this report in a broader context. The most interesting data in this GDP report is the large downward revision in U.S. GDP growth for 2018. Every quarter in 2018 was revised downward, resulting in a less-impressive Q4/Q4 growth rate of 2.5% compared to 3.0% reported previously. In short, the 2017 Tax Cuts and Jobs Act was a complete dud in boosting our long-term economic growth rate.Tax cut bump was short-lived
Growth increased by a few tenths of a percentage point for a quarter or two on a year-on-year basis, but by the end of 2018, the drag from the global economy and U.S.-China Trade war were already taking a toll. In fact, with the GDP revisions made today, we see that Q4/Q4 growth was faster in 2017 than in 2018, a year after the tax bill was enacted. By the second quarter of 2019, GDP growth year-on-year has slipped to 2.3%, just above the 10-year expansion average of 2.1%.
I don’t think we got the economic bang for the buck we were promised when the tax bill was signed and now we will be living with the consequences – trillion dollar plus budget deficits as far as the eye can see. For the record, I was skeptical from day one, but this report provides some pretty strong additional evidence in support of that premise.
We are taking our cue for the economic and interest rate outlook from the darkening business environment. Today’s GDP release also showed that corporate profits after tax, with inventory and capital adjustments, dropped 4.1% in the first quarter. In addition, second-quarter non-residential fixed investment declined for the first time since the first quarter of 2016. Before long stock markets and U.S. households will be forced to take note of the changing business landscape, and consumer spending growth will follow. Expect a quarter-point rate cut from the FOMC next week in response.
For more on this, see my full U.S. Outlook, delivered on July 26.