Yesterday, the second quarter GDP report (economic activity) was released. This is the initial print from the Bureau of Economic Analysis. It will see two more prints but the initial one is always the headline story. Revisions of late, tend to be down versus up (improvement).
I eschew the headlines for the details as the numbers jumble together to create a picture but the “devil is in the details”. The details paint the real picture, sometimes a favorable trend and sometimes, an iffy outlook. This time, I would classify the report to paint a mixed outlook, more iffy than certain.
The headline number is the economy grew at a rate of 2.4%, better than expected but yet below, inflation, consumer and core and about par with year-to-date producer price inflation (2.3% through June). The first quarter increase/change in GDP has settled out (three prints) to 2%.
Looking through the numbers, there are some interesting data points that worked together to drive this result. If you (reader) have any interest, the full report is available here: BEA 2nd Qrtr GDP It includes the data tables so you can see what I am seeing if you wish to dig through it.
- Personal consumption dropped dramatically from 4.2% to 1.6% (first to second quarter). This is commonly known as the behavior of the “consumer”. Personal consumption or the consumer and his/her activity account for 64.26% (long-term average) of GDP. This maybe a tell that the consumer is moving toward a conservative expenditure outlook and playing consumption to only the necessities. If this trend continues, the outlook tends to be more recessionary.
- Gross Private Domestic Invesment rebounded from -11.9% in Q1 to 5.7% in Q2. What is interesting here is that all of the growth was business investment or non-residential. Residential investment shrunk, -4.2%.
- Exports and imports were negative, though goods exports were marginally positive. Again, this is a shift from the prior quarter indicative of a slowing economy.
- Government consumption slowed from 5% to 2.6%.
- Real personal income (increase in) dipped rather dramatically from 8.5% to 2.5%. Disposable personal income increased 5.2% vs. 12.9% in the prior quarter. Current-dollar personal income increased $236 billion vs. $278 billion in the prior quarter, primarily due to increases in wages. Personal saving rate as a percentage of disposable income remained flat at 4.4%.
- A measure of inflation, the PCE index increased 2.6% in the second quarter compared to 4.1% in the first quarter. Excluding food and energy, the index increased 3.8% vs. 4.9% in the first quarter.
The question that now will be asked is whether this report continues to challenge the Federal Reserve to become even more restrictive with its rate policy. They have not taken another increase off the table as of yesterday’s meeting. The two big numbers however, indicative of where the economy may be trending, are personal consumption and residential investment. Remember, the consumer is nearly 70% of GDP activity and IF, the consumer is growing more cautious, GDP growth will quickly stall. Residential investment reflects how much the housing market has already stalled.
This report was a better-than-expected print, but I believe caution is warranted, principally due to the change (dramatic) in consumer spending. My quick forecast for the next two quarters and then first two in 2024 is below. Stay tuned and we’ll see how close I come.
- 3rd Quarter 2023: 0.25%
- 4th Quarter 2023: 1.0%
- 1st Quarter 2024: 1.25%
- 2nd Quarter 2024: 1.0%
P.S.: This outlook is classic stagflation (BTW) and I think the Fed adopts a rate reduction stance after the second quarter of 2024.
TGIF!