Slower Growth but Not a Slow Economy - July 29, 2019

The U.S. Bureau of Economic Analysis reported that Gross Domestic Product (GDP), the largest measure of U.S. economic activity, slowed from Q1’s annualized pace of 3.1% to a still-respectable 2.1% in the second quarter.

In some respects, key internals in the Q2 number were more impressive than Q1.

Q1 was bolstered by a modest increase in business spending, a big rise in business inventories, and a surge in exports, which have been whipsawed by trade tensions. But consumer spending was soft.

In Q2, consumer spending, which accounts for 70% of GDP, rebounded sharply. What held GDP back? A decline in business spending, exports, and falling business inventories.

Another way to gauge economic activity is to measure the year-over-year change in GDP – see Figure 1 – as opposed to annualizing each quarter’s change.

Yes, the pace of growth has moderated. That’s not surprising. Still, the decade-long expansion remains intact. Besides, we witnessed a much sharper slowdown in 2016, and a recession did not ensue.

Bottom line, the consumer is healthy and the service sector is expanding, offsetting weakness in manufacturing and business spending.

Trade tensions and slower global growth are likely pressuring manufacturing and business outlays, but there are few signs that suggest the economy is about to stall.

On tap, the Fed

The Fed will meet on Tuesday and Wednesday to decide its next move on interest rates.

Given the improvement in consumer spending and a still-strong labor market, a case can be made to hold interest rates at current levels. In fact, if we simply average the numbers for the first two quarters, 2.6% GDP growth is far from alarming.

But Fed officials haven’t been shy about telegraphing their intentions, and most observers anticipate a quarter-percentage point cut in the fed funds rate.