July 27, 2018

2Q18 Gross Domestic Product (072618): An Annualized +4.1 Percent; Fixed Corporate Investment and Exports Are Strong, Inventory Change a Significant Drag

Filed under: Economy,Taxes & Government — Tom @ 6:11 am

NOTE: Also see the separate post on prior-year revisions published later today.

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OVERVIEW:

An unnamed fixed-income strategist contends at MarketWatch that “never has a reading of gross domestic product held so much significance.”

If that person is exaggerating, it’s not by much. Today’s report will be:

  • The first full-quarter referendum on the effectiveness of the tax cuts passed in December.
  • Because of delays in new policy implementation, inherited old policies, delays in key nominee confirmations and the like, the first report whose results finally can be almost completely assigned to Trump administration policies for credit (or blame).
  • The first revised look at how the economy fared during 2017 and early 2018 and during the latter (and perhaps even earlier) Obama years, since the report will also contain revised growth data going back several years.

PREDICTIONS:

  • Moody’s has an annualized 4.0 percent. Its CNBC consensus is 4.1 percent.
  • The Atlanta Federal Reserve has pulled back to 3.8 percent during the past few days.
  • The New York Federal Reserve’s GDP Nowcast model shows 2.69 percent; its last update was July 20.
  • IHS Macroeconomic Advisers, which was estimating 5.3 percent in late June based on the quarter’s first two months, now believes that the economy contracted by 0.2 percent in June (seriously). Though its latest report doesn’t have a published second-quarter growth percentage estimate, one can infer from its estimated GDP figures that the economy grew in raw terms by 0.92 percent in the second quarter, which annualizes to 3.7 percent.
  • A contrarian take at Zero Hedge quotes a Morgan Stanley prediction of 4.7 percent. The author believes that it will be artificially juiced because “exports have surged and inventories have swelled” on expectations that tariffs and trade tensions will make many raw materials and components more expensive in future quarters. The irony which shouldn’t be missed is that the press has spent much of the past 60 days looking for negative news about employment and commerce caused by trade tensions — and now the author of the ZH post says that it will cause (temporarily) good news, followed by weakness thereafter. It seems likely that the press will do a 180, swallow this “logic,” and use it to pooh-pooh today’s results, especially if they’re strong. CBS is already going there.

THE REVISIONS:

Three things to look for here are, first, the effect on previously reported quarters and years during the Obama era. I’m finding it hard to imagine that they’ll remain at even the largely mediocre levels previously reported, primarily because of serious dips in manufacturing orders and shipments during late 2014, all of 2015, and all of 2016 (note that the figures at the links are NOT adjusted for inflation).

Second, we’ll also see how the Trump era’s first five quarters get revised. I don’t expect to see much movement here, but if there is, I think it will be slightly upward.

Third, if the first quarter of 2018 gets revised up significantly, one could argue that it has taken away a bit of the growth everyone is expecting to see in the second quarter.

RELEASE:

The report will be here at 8:30 a.m. (full text with tables will be here). I’ve loaded all previous GDP growth figures into a spreadsheet, and IF the prior revisions are significant, I’ll post separately on them.

Below is the pre-release spreadsheet showing all quarters during Trump era, with today’s figures obviously not included and prior quarters not yet revised.

Fasten your seat belts.

UPDATE, 8:30 A.M: HERE IT IS —

Real gross domestic product increased at an annual rate of 4.1 percent in the second quarter of 2018 (table 1), according to the “advance” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2.2 percent (revised).

The Bureau emphasized that the second-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency. The “second” estimate for the second quarter, based on more complete data, will be released on August 29, 2018.

The increase in real GDP in the second quarter reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, federal government spending, and state and local government spending that were partly offset by negative contributions from private inventory investment and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

The acceleration in real GDP growth in the second quarter reflected accelerations in PCE and in exports, a smaller decrease in residential fixed investment, and accelerations in federal government spending and in state and local spending. These movements were partly offset by a downturn in private inventory investment and a deceleration in nonresidential fixed investment. Imports decelerated.

Current-dollar GDP increased 7.4 percent, or $361.5 billion, in the second quarter to a level of $20.4 trillion. In the first quarter, current-dollar GDP increased 4.3 percent, or $209.2 billion.

The price index for gross domestic purchases increased 2.3 percent in the second quarter, compared with an increase of 2.5 percent in the first quarter. The PCE price index increased 1.8 percent, compared with an increase of 2.5 percent. Excluding food and energy prices, the PCE price index increased 2.0 percent, compared with an increase of 2.2 percent.

Personal Income

Current-dollar personal income increased $183.7 billion in the second quarter, compared with an increase of $215.8 billion in the first quarter. Decelerations in wages and salaries, government social benefits, personal interest income, and nonfarm proprietors’ income were partly offset by accelerations in personal dividend income and rental income, a deceleration in contributions for government social insurance (a subtraction in the calculation of personal income), and an upturn in farm proprietors’ income.

Disposable personal income increased $167.5 billion, or 4.5 percent, in the second quarter, compared with an increase of $256.7 billion, or 7.0 percent, in the first quarter. Real disposable personal income increased 2.6 percent, compared with an increase of 4.4 percent.

Personal saving was $1,051.1 billion in the second quarter, compared with $1094.1 billion in the first quarter. The personal saving rate — personal saving as a percentage of disposable personal income — was 6.8 percent in the second quarter, compared with 7.2 percent in the first quarter.

Updates for the first quarter of 2018

For the first quarter of 2018, real GDP is now estimated to have increased 2.2 percent (table 1); in the previously published estimates, first-quarter GDP was estimated to have increased 2.0 percent. The 0.2-percentage point upward revision to the percent change in first-quarter real GDP primarily reflected upward revisions to private inventory investment, nonresidential fixed investment, and federal government spending that were partly offset by downward revisions to PCE and residential fixed investment. Imports were revised down.

Real GDI is now estimated to have increased 3.9 percent in the first quarter (table 1); in the previously published estimates, first-quarter GDI was estimated to have increased 3.6 percent.

HERE IS the up-to-date components table:

GDPcomponentsThru2Q18at072718

The net loss over the five quarters is 0.3 points. Annualized growth during the five full quarters of the Trump era has been 2.87 percent.

As might be expected, there’s good and bad news here:

  • One item of very good news is Fixed Nonresidential Investment, which has been strong during the past six quarters, averaging a 0.95-point contribution during that time. The average during the eight quarters in 2015 and 2016 was only 0.07 points. That’s about as night-and-day as you can get. That said, I would hope that the 2Q18 number improves in future revisions, because increased domestic investment was one of the goals of December’s tax-law changes.
  • As explained earlier, the press is going to treat the increase in exports as a rush to beat anticipated tariffs and trade tensions. I’m not buying it, partially because I think that U.S. jawboning has led to less resistance to U.S. exports in other nations. But we’ll just have to see, especially because tensions with the EU have de-escalated in recent days.
  • On the downside, the negative inventory change is a surprise. That may be partially explained by the upward revision in that figure in the first quarter (from -0.01 published in June to the +0.27 seen above), but I have a hard time believing that the figure will remain as negative in the August and September revisions.
  • Also on the downside, residential investment is in the doldrums, and seems likely to remain there because of the debt overhang, especially with millennials.

The guess here is that August and September will show pretty small upward revisions. But I wouldn’t rule out a significant upside surprise if today’s inventory component is shown to be far too negative.

 

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