GDP Impresses, But 4% Won’t Last

Today the Bureau of Economic Analysis (BEA) released the first estimate of Q2 GDP data. Quarterly GDP is released 3 times per quarter, starting at the end of the first month following the quarter. In any quarter, the first release is revised significantly, and over the long term there are further benchmark revisions.

As shown in the table below, GDP grew 4.1% QoQ SAAR in Q2’s first estimate. That was slightly weaker than the 4.2% QoQ SAAR growth estimated by economists, but still a very strong pace. As shown in the table, the biggest drivers of that 4.1% advance was the 2.7% contribution from consumption. Government added a modest but reasonable 0.4% to total growth, while trade exploded higher, adding 1.1% to growth.

The weakness in this report was in investment: inventory draws cut 1% off QoQ SAAR GDP, while fixed added 0.9% despite a small headwind from fixed investment. Going forward, expect consumption to be much less explosive: tax cuts boosted spending as workers saw lower withholding in their paychecks, but that’s not going to be repeated going forward when it comes to growth rates. Trade will flip from strong positive to either neutral or a modest headwind as agricultural exports slow (they spiked in Q2 as shippers avoided tariff hikes). Fixed investment, especially nonresidential, may slow a bit but looks likely to sit at a similar growth rate. Finally, inventories are likely to flip from a huge headwind to a much stronger tailwind. Inventory/sales ratios remain at extremely low levels. The growth outlook overall looks positive but unlikely to sustain a +4% growth rate.