Q2 US GDP report: Consumers wake up – consumption growth supports GDP

In the advance estimate of Q2 GDP, the BEA estimated that the US economy grew at a 2.3% q/q saar pace, below our (3.0%) and consensus forecasts (2.5%) for a more modest gain. Personal consumption, however, expanded at a 2.9%, in line with expectations for a 2.7% rise, as consumption on goods rose by a robust 7.3% versus a solid 2.1% rise in services. The strength in goods consumption was foreshadowed by auto sales, which increased robustly over the quarter.  Auto sales cooled toward the end of the quarter, and although sales will remain at current high levels, it is expected that, further strong increases in this part of consumption. The overall rebound in consumption was supported by 3.9% and 1.6% gain nominal compensation and real disposable personal income, respectively. The savings rate fell from a revised 5.2% in Q1 to 4.8% in Q2.  It is expected that, savings rate will gradually return to about 4.5% as households increase spending to keep their consumption in line with past gains in wealth.

"Elsewhere in the report, equipment and residential investment, and net trade were modestly weaker than anticipated. Equipment investment fell 4.1% q/q saar versus expectation of a 4.0% rise.  Residential investment rose a very good 6.6% q/q saar but the rise was considerably weaker than the 11.0% gain. Net trade added 0.1pp to growth, compared with the expectation of 0.2pp positive contribution, as exports rose 5.3% and imports rose by 3.5%. The distortions induced by West Coast port strike has continued to influence trade data through Q2", says Barclays.

As the strike effects wane, stronger foreign exchange value of the dollar to pull the contribution from trade lower, reducing GDP by about 0.3pp per quarter over the remainder of the year. Structures investment fell 1.6% q/q saar. There is sharp drop in structures as driven primarily by the significant reduction in energy-related capex spending following the sharp decline in oil prices last year. With oil prices having fallen further more recently, it is expected that, energy sector will continue to weigh on growth in Q3. Finally, inventory accumulation subtracted a modest 0.1pp from growth versus our expectation of a neutral contribution.

Contained in this release were downward revisions to growth over the past several years.  On net, these changes reduced the growth rate to a 1.9% average over the past three years.  As the great destruction, severe recessions intertwined with financial crises have historically been associated with lost output and slower potential growth.  It is estimated that, potential growth was pulled down by about 1.5pp since 1999

The residual seasonality in investment, growth in Q1 has systematically underperformed since the 2008-09 recession. It is found that this underperformance can be traced to an incomplete seasonal adjustment process, which leaves residual seasonality in many investment categories. At that time, it was estimated to remove this residual seasonality and found that growth in Q1 15 would have been reported at 1.6% instead of the -0.2% published estimate. With this release of GDP, the BEA addressed, in part, this statistical issue with the data.  However, instead of boosting Q1 by the amount of estimate, it made a slightly smaller correction. By estimate, it removed about one-third of the residual seasonal pattern. On net, the revision will make H1 slightly stronger and H2 slightly weaker relative to pre-revision data, notes Barclays