Looking Back, Looking Ahead

The advance GDP report for 2Q17 contained few surprises. Growth was largely in line with expectations, leaving growth for the first half of the year at a 1.9% annual rate. Recent reports suggest some loss of momentum for the consumer, but rising real wages ought to provide support. The second half outlook should come into better view as the July data begin to arrive. While the growth outlook may be disappointing relative to earlier expectations, it’s still a good backdrop for the markets.

Scott Brown
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Consumer spending, which accounts for 69% of Gross Domestic Product, picked up in the second quarter, while the annual benchmark revisions appear to have shifted some strength from 4Q16 into 1Q17. Business fixed investment remained strong, although not quite as robust as in the first quarter. While business optimism has been supportive, nearly half of this year’s growth in business fixed investment has been concentrated in energy exploration. Residential homebuilding weakened in the second quarter, but that followed weather-related strength in 1Q17. Slower inventory growth subtracted nearly 1.5 percentage points from headline GDP growth in the first quarter. Economists had expected an inventory rebuild to add significantly to GDP growth in 2Q17. That didn’t happen (at least in the advance data). None of this tells us much about the growth prospects for the second half of the year.

While the 2Q17 consumer spending data show improvement relative to the first quarter, monthly figures point to a lack of momentum heading into 3Q17. We’ll get a better idea following Tuesday’s release of personal income and spending figures for June (which will include annual benchmark revisions). Job growth has certainly been supportive. Nominal wage growth has been moderate, but the rise in gasoline prices (relative to a year ago) was a sharp restraint on real wage growth. That appears to be changing, and improvement in real wages ought to support consumer spending growth in the second half.