EconoFACTS

August 30, 2023 | 09:07

Slow Is Good

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has been wi... (Read more)

This is what is needed. Like yucky medicine. It doesn't taste good but it works. (Name the cough syrup.)

The U.S. economy grew for the fifth quarter in a row, up 2.1% annualized in Q2, but that was downwardly revised from the first estimate of 2.4%. However, remember that the first estimate for real GDP was firmly above expectations at the time and this revision doesn't change that.

So what happened? Let me tell you. Inventories shrank $1.8 bln in Q2, which was a big swing from the +$9.3 bln in the initial estimate. So, instead of adding to the headline, inventories subtracted 0.1 ppts (the second quarter in a row). The decline in exports was trimmed a little, and imports didn't fall as much as the first estimate, so net exports ended up subtracting 0.22 ppts from the headline. Fixed investment (equipment, IP) also didn't rise as quickly as first thought, which is the other reason behind the lower headline.

Was there anything that was HIGHER than the first estimate? Excellent question. Personal spending was revised up a smidge (to 1.7% a.r., instead of 1.6%), but all due to services and nondurables. Interestingly, there was a drop in spending on durables, instead of a rise. Government spending was also up more than the first round of estimates.

But we're already knee-deep in Q3 and so far, we've had mixed results ... positive news from retail sales but tomorrow's July PCE #s will be key. On the business side, core durable goods orders were weak. Meantime, the trade deficit widened to $91.2 bln in July, a 2-month high, but the reasons were good and an indication of still-strong demand. Exports rebounded 1.5% (first increase in 4 mths) and imports jumped 1.9% (first increase in 3 mths). Consumer goods imports excluding autos surged 4.1%, the most in six months. And, on the inventory side of things, it is inching up.... business inventories rose for the first time in 3 months, up 0.1% in July while June's increase was revised to a drop, which explains the revision in the Q2 GDP report.

And for those who are interested in GDI, the average of GDI and GDP worked out to 1.3%, the fastest since Q3.

And breathe.

What does this all mean? After 525 bps of Fed rate hikes, the U.S. economy is still growing... and 2% in the most recent quarter. Interestingly, though, the U.S. consumer is still going at it ... even as job growth slows. Recall the Conference Board's survey for August, which showed a record share of respondents saying that they had plans to vacation outside of the U.S. borders in the next six months. Definitely keep an eye on wages tomorrow... in the PCE report. That is the most important brick in this wall. Meantime, policymakers are nodding and probably thinking, "things are slowing.. that is a good sign."

Table 1 - United States — Real GDP

(quarter/quarter % change : s.a.a.r.)

Source: BMO Economics, Haver Analytics