Weekly Economic Trends and Indicators

The Headline:

The Bureau of Economic Analysis (BEA) reported last week that real gross domestic product (GDP) increased at a seasonally adjusted annual rate of 2.8% in the second quarter. This was the third highest rate of growth out of the last ten quarters and near or slightly above the long-term growth of the economy.

In a separate release on Friday, the BEA reported that personal consumption expenditure (PCE) inflation was 0.1% for the month of June. Core PCE inflation (excluding food and energy prices) was 0.2%. Over the last twelve months, PCE inflation was 2.5% in June, down from 2.6% in May. Twelve-month core PCE inflation was unchanged at 2.6%.

The Details:

Consumer spending rebounded in the second quarter, growing at an annual rate of 2.3%, up from 1.5% in the previous quarter, and accounted for more than half of the overall growth of GDP. Investment in equipment saw the highest rate of growth in the quarter (11.6%) with investment in both residential and non-residential structures decreasing. Government consumption and investment increased by 3.1%, mostly led by defense spending (up 5.2%). Exports increased modestly (2.0%) while imports grew 6.9% on the strength of the dollar overseas.

Private inventories increased by $71.3 billion, which is the highest increase since the third quarter of last year. Large increases in inventories can be a sign of production getting ahead of spending and are sometimes associated with lower GDP in quarters that follow.

The Context:

Overall, this week’s news was quite positive. GDP growth came in slightly higher than some of the expectations earlier in the quarter, and the consumer continued to be resilient to the “higher for longer” interest rates. However, the decline in investment in structures, along with the increase in imports (which decrease GDP) and increase in inventories suggest that there is still some weakness in the picture.

While this quarter’s headline GDP number was solid, there is increasing sentiment that if interest rates remain at the current levels, something will break. As inflation comes down (as Friday’s data confirms), the real interest rate increases and becomes even more restrictive. Hence, the conventional wisdom is now that a Fed rate cut by September is all but a certainty. Some even argue for a cut this week, however that looks unlikely. It is more likely that the Fed will lay some groundwork in the press conference this week and at the Jackson Hole meeting in a few weeks so that everyone is on the same page.

The current week will be very important in the formation of expectations for the rest of the year. Tech earnings, a Fed meeting, and July employment are all on the agenda. Recent changes in the presidential election picture will also continue to impact expectations over the next few months.

Next week: Employment update