Consumer Spending – I’ll Bet that Q3 Real GDP Growth Will Be Closer to Q1’s than Q2’s

It’s too hot to go sailing today, so I thought I’d “unpack”, as the kids on cable news say, second quarter real GDP and real personal consumption growth (PCE). I will argue that the quarter-to-quarter acceleration in the growth of both second quarter real GDP and real PCE was due more to arithmetic than a fundamental acceleration in the growth of aggregate demand. To refresh your memory, real GDP annualized growth in the second quarter was 2.6% versus 1.2% in the first quarter. Real PCE growth annualized growth in the second quarter was 2.8% versus 1.9% in the first quarter.
Let’s take a look at the month-to-month annualized real PCE growth over the first six months of 2017 (see Chart 1). The median month-to-month annualized real PCE growth during this time period was a paltry 0.6%. The outlier during this period was March, when annualized real PCE growth was a whopping 9.2%. The annualized growth rate of real PCE in April, May and June were 0.20%, 2.20% and 0.45%, respectively. The three-month average of the annualized growth rates of real PCE for April, May and June was 1.15%, a far cry from the 2.8% annualized growth in the quarterly average level of real PCE.
Chart 1
Chart 2
Chart 3
If the Fed does, in fact, begin paring its outright holdings of securities in September, then it had better start engaging in repurchase agreements. Otherwise the monetary base will shrink and, all else the same, there will be upward pressure on the federal funds rate. If the monetary base shrinks, thin-air credit growth will slow further unless there is an offsetting increase in bank credit. If thin-air credit growth slows further in the months ahead, investment-grade bond yields will fall more from their already-low levels – barring a Treasury default emanating from a failure to raise the federal government debt ceiling.
Lastly, my former Northern Trust colleague, Asha Bangalore, has announced her retirement. Her last day at Northern will be August 14. Asha joined me at Northern in 1994. Any success I might have had at Northern was, in large part, due to having Asha as a colleague. She was my “Radar” O’Reilly, knowing what we needed and obtaining it long before I even thought of it. I was always in awe of Asha’s time-management skills. Where as I am a congenital procrastinator, Asha immediately tackles any project regardless of how difficult or boring it might be. I was blessed to have had such a knowledgeable and capable colleague as Asha. Asha, best wishes as you enter this new phase of your life. Who knows, perhaps we can put the team together again if you get bored in retirement?
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