Q2 GDP – Tapping on the Brakes - July 24, 2019

The first peek at Gross Domestic Product (GDP) on Friday will likely show a moderation in activity vs Q1.

  • Q1 posted a 3.1% annualized pace vs a forecast of 1.9% in Q2 (Econoday).

Yet, headline numbers can be misleading.

In Q1, soft consumer and business spending was offset by swelling business inventories and a surge in exports, which have been whipsawed by trade tensions.

Consumer spending rebounded in Q2, but exports have turned lower. Therefore, Q2’s headline may not reflect a firmer underlying economic tone.

Viewing through a broader lens

First, GDP is a backward-looking number. In this case, it measures activity between April and June. We are about to enter August. Investors are forward-looking, collectively trying to anticipate future growth.

Second, one-off factors can skew quarterly numbers. Averaging Q1 and Q2 will provide us with a clearer picture.

Expected verdict: economic activity isn’t as strong as 2018, but the economy is expanding.

Investor’s corner

The economy is the engine that supports profit growth for the larger blue chip firms.

When falling interest rates are sprinkled into the stock market price equation, we create conditions that have generated strong market returns this year.