Saturday, July 28, 2018

2nd Quarter GDP good, but we've been here before. In fact, Obama era was even better than we knew

A lot of attention was given to yesterday's first look at GDP for the 2nd Quarter of GDP. And it came in well, as the growth of 4.1% was the best in one quarter in nearly 4 years, and was largely the result of everyday Americans spending more in the Spring after a slowdown for the first 3 months of the year.
Friday’s report also showed that personal consumption in the second quarter grew at an annualized rate of 4%, a major jump from the 0.5% pace of consumption growth seen to start the year.

Meanwhile core PCE prices, a measure of inflation, grew 2% quarter-on-quarter, less than expected and a slight deceleration from the 2.2% pace of price growth seen to start the year.

The acceleration in real GDP growth in the second quarter reflected accelerations in PCE and in exports, a smaller decrease in residential fixed investment, and accelerations in federal government spending and in state and local spending, the BEA said in its release Friday.

These movements were partly offset by a downturn in private inventory investment and a deceleration in nonresidential fixed investment. Imports decelerated.

Interestingly, forecasts were for even stronger growth than 4.1%, and the lower-than-expected inflation number would have led you to think the real GDP number would be even higher. But it seems to have been limited by two main reasons.

1. A major shrinking of inventories (shown in pink on the chart above), reducing 1% from growth in Q2. This could also give a little support to GDP in the 2nd half of this year as shelves will need to get restocked.

2. The previous years and quarters were noticeably better, particularly during the Obama Administration.

We know this because today’s report also included several years of revisions to prior years and quarters of GDP results. And we found out that the US economy’s recovery from the Great Recession was a bit stronger and quicker than what was previously known (particularly in office buildings and equipment).

Interestingly, even though 2017 had an increase in the current dollar GDP, because the previous years were even stronger, the real annual GDP growth rate for 2017 actually dropped to 2.2% with these revisions.

In addition to the increased strength of the Obama Recovery, the part that jumped out at me in these revisions was notable upward revisions in income, not only for the mid-2010s under Obama, but also last year under Trump.
Personal income was revised up $95.0 billion, or 0.7 percent, for 2012; was revised up $107.4 billion, or 0.8 percent, for 2013; was revised up $173.6 billion, or 1.2 percent, for 2014; was revised up $166.6 billion, or 1.1 percent, for 2015; was revised up $196.4 billion, or 1.2 percent, for 2016; and was revised up $401.9 billion, or 2.4 percent, for 2017.

From 2012 to 2017, the average annual rate of growth of real disposable personal income was revised up 0.4 percentage point from 1.8 percent to 2.2 percent.
And because people had $205 billion more in income than we knew of last year, but actually consumed slightly less than the original figures showed, it means that the savings rate stayed high in 2017.
The personal saving rate (personal saving as a percentage of disposable personal income) was revised up from 7.6 percent to 8.9 percent for 2012; was revised up from 5.0 percent to 6.4 percent for 2013; was revised up from 5.7 percent to 7.3 percent for 2014; was revised up from 6.1 percent to 7.6 percent for 2016; was revised up from 4.9 percent to 6.7 percent for 2016; and was revised up from 3.4 percent to 6.7 percent for 2017.
The reported drop in the savings rate that we had seen throughout 2017 and 2018 was one reason I was fearing that we were back in 2006 in our economy, right before the housing Bubble popped under a mountain of debt. That take of mine now looks way off with this new information, because If the savings rate is maintaining at a decent level, then our economy is fundamentally stronger, and is less at risk of having our current housing Bubble being blown too far out of proportion.

But those improved income stats from 2017 also make the GOP’s Tax Scam all the more absurd, especially the tax cuts on the corporate side. Things were in decent shape at the end of 2017, with far from any need for extra stimulus. And so far, the Tax Scam has barely change the rate of growth of total compensation than we saw over the last 2 years.

6-month growth, total compensation Q2 2016-Q2 2018
2nd half 2016 +2.22%
1st half 2017 +2.28%
2nd half 2017 +2.21%
1st half 2018 +2.37%

The 1st half of 2018 also saw a pickup in inflation, so the real change in compensation is, if anything, less than it was when Trump was elected. So why blow up the deficit and encourage more profit-taking and job-killing “efficiency” moves by corporations through a lower tax rate? Well, other than pay-for-play corruption, of course.

The question going ahead is whether the tax cuts lead to a spiral of growth from increased consumer spending, or if this just pushed a few purchases forward. In addition to the tax cuts, another Trump move gave a slight bump to Q2, but likely will cost us in later quarters. Exports contributed more than ¼ of that 4.1% growth rate, and financial analysts indicate that those added exports may indicate a rushing out of items ahead of the Trump tariffs that were to hit in Q3.
"Anxiety around a global trade war has fueled a jump in U.S. exports ahead of tariffs," LPL Financial wrote in a note. The imposition of broad-based tariffs in early July created a deadline that many U.S. exporters raced to beat, as the narrowing trade deficit shows. "The increase in exports is primarily from increased demand as purchasers try to beat retaliatory tariffs, evidenced by soybeans and civilian aircrafts comprising almost all of the jump in exported goods in May," LPL Financial wrote.

While this boosts the second-quarter number, the increase is somewhat misleading, because it's essentially moving up activity that would have occurred later in the year.
And just like with the bump in exports, this “fastest growth in 4 years” seems likely to be a blip that fades in the near future with the higher deficit raising interest rates and cutting demand.
"That's likely to be a one-time deal," said LPL Financial's [Ryan] Detrick. "We think the second half the year is likely to be around 3 percent [GDP growth]. The exports are going to be a wild card that's going to make [the 2nd] quarter stick out like a sore thumb."

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