EconoFACTS

July 26, 2019 | 09:15

U.S. Real GDP (2019 Q2 A) — So Much For Fiscal Drag

Economist

Director and Senior Economist
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Director and Senior Economist
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

U.S. real GDP rose 2.1% annualized in the second quarter, downshifting from 3.1% in the first quarter and downwardly-revised gains in the second half of last year. Consumers lifted spending 4.3%, rebounding from special factors (such as the government shutdown) that cooled demand 1.1% in Q1. The bigger upside surprise was a 5.0% pop in government spending, led by nondefense federal (15.9% due to delayed pay for some federal workers after the shutdown) and another 3%-plus advance in state and local (still fixing roads). On the downside, nonresidential investment fell 0.6% after a couple of 4%-plus quarterly gains. The fading lift from tax reform and Boeing's problems weighed. Spending on structures plunged 10.6%. Residential construction shrank for a sixth straight quarter, despite plunging borrowing costs. Exports retraced with a 5.1% decline on slower global demand and China's retaliatory duties. The burst of consumer spending curbed inventory investment, carving 0.9 ppts from GDP growth.

Overall, the report suggests a little more pep in the economy than we previously thought, highlight an upside risk for growth in the second half of the year, especially if consumers stay upbeat. Private domestic demand rose 3.2% a.r. in Q2, the most in a year. Business investment looks to improve in Q3 on the back of recent stronger capital goods orders. The economy expanded 2.3% in the past year, in line with the current record-long expansion's mean. It will likely slow in the second half, but possibly less than we expected. And, in light of the recent fiscal deal, we could see somewhat stronger growth next year, too.

The Fed will still cut rates next week, as the core PCE remained below target, up 1.8% a.r. (though we really are splitting hairs here). However, further easing will depend on the economy's performance and the outcome of trade talks.

Table 1 - United States — Real GDP

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

Source: BMO Economics, Haver Analytics