Data on the US GDP in Q2 2023 (Apr-June) published by the US Bureau of Economic Analysis marginally expanded by 2.1% YoY over 2% YoY in the previous interval.

Although the measure showed a weak increase, this was well below advanced estimates of 2.4% annualized growth for the quarter, following tepid business investment conditions.

The figure also came in well below the market consensus of 2.4% as reported by TradingEconomics.com.

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Source: TradingEconomics.com, U.S. BEA

The expansion in GDP comes amid elevated inflation, the Federal Reserve’s most hawkish cycle in decades coupled with Governor Powell’s recent comments at Jackson Hole, stating,

…(inflation is) too high.

The S&P rose to 4,521 shortly after the data release on optimism that the Fed would be able to navigate a ‘soft landing’, but momentum seems to have weakened with equities falling to 4,505 at the time of writing, only 5 points above the open of 4,500.7.

Components

The increase in GDP was due to higher consumer spending (which moderated to 1.7% YoY against 4.2% YoY in Q1), non-residential fixed investment (which jumped from 0.6% YoY in Q1 to 6.1% YoY in Q2), and state and local government spending (which rose from 4.4% YoY in Q1 to 4.7% YoY in Q2).

Consumer spending, the main contributor to American growth, outperformed the advanced estimates of 1.6% YoY, although spending on durables contracted by 0.3% YoY, declining sharply from 16.3% YoY in the previous interval.

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Source: TradingEconomics.com, U.S. BEA

On the other hand, GDP growth was capped by decreases in exports (7.8% YoY in Q1 to -10.6% YoY in Q2), residential fixed investment (remained in contractionary territory but improved from -4% YoY in Q1 to -3.6% YoY in Q2), and imports (which declined from 2% YoY in Q1 and nosedived to -7% YoY in Q2).

Versus advanced estimates, exports improved from expectations of (-)10.8% YoY, while imports improved from (-)7.8% YoY.

For Q1, the advance annualized reading of 2.4% YoY was revised downwards to 2.0% YoY.

Corporate profits

Profits from current production (which include corporate profits with inventory valuation and capital consumption adjustments) fell by $10.6 bn in Q2, moderating from the sharp decline of $121.5 bn in Q1.

Domestic financial corporations saw their Q2 profits decrease by $47.8 bn as against $9.4 bn in Q2.

On the contrary, profits of domestic nonfinancial corporations rose by $17.1 bn partially offsetting the $103 bn decline in the first quarter.

On a quarterly basis, adjusted pre-tax profits fell by 0.4% in Q2, and were sharply down by 6.5% YoY.

Although Q2 profits declined, they improved upon the (-) 4.1% recorded in Q1 2023.

PCE

For the quarter, the price index for personal consumption expenditures (PCE) rose 2.5 percent YoY, moderating dramatically from 4.1% YoY in Q1.

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Source: TradingEconomics.com, U.S. BEA

Responding to hawkish measures, core PCE, the favoured inflation gauge of the US Fed saw a marked decline as well, falling to 3.7% YoY in Q2, as against 4.9% in Q1, and outperformed advanced estimates of 3.8% YoY.

Crucially, this marked the slowest increase in almost two years.

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Source: TradingEconomics.com, U.S. BEA

CME’s FedWatch Tool, a measure of probabilities of future rate actions, estimates a 90.5% chance of the Fed maintaining the status quo in the next meeting.

Outlook

Despite the fall in core PCE growth and initial market response, a Reuters report noted that Fed officials believe that the non-inflationary growth rate lies in the vicinity of 1.8%, suggesting that inflation will remain a concern.

This implies that the Fed will likely continue to tighten, reflected in the CME FedWatch Tool which shows an approximately 47% chance of a hike in the Fed’s November meeting.

However, as mentioned in the earlier article on the Jackson Hole conference, the relatively robust performance of the economy may be in part due to the $500 bn in excess savings that were built up due to the pandemic-era’s unprecedented fiscal injections.

The SF Fed expects this quantum of savings to support consumption into Q4 but may see a fall-off thereafter, which may have the potential to trigger an unexpectedly acute slowdown.

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