Via Chris Low at FTN Financial:
The economic landscape looks very different this morning after the GDP report and annual revisions. The slowdown from peak growth in 2014 is more apparent and growth lately is downright weak, averaging just 1% in the past three quarters.
In the second quarter, growth rose to 1.2%, well below expectations, from a revised 0.8% (was 1.0%). A rare outright drop of $8bn in inventories accounted for most of the weakness. Final sales, GDP ex-inventories, rose 2.4%.
But even that 2.4% rise in final sales has caveats as it was fueled by an 8.4% rise in durable goods consumption thanks to a jump in recreational goods and vehicles and in auto sales. Anyone who read Ford’s earnings report yesterday knows the latter won’t last, especially after the CFPB’s announced changes in debt collection rules.
· Consumption +4.2%, most since Q4-14’s 4.6%, added 2.83% to GDP
· Business fixed investment -2.2%
o Equipment -3.5%
o Structures -7.9%
o Intellectual property +3.5%
· Residential investment -6.1%, first drop since Q1-14, on weakness in single-family
· Exports 1.4%
· Imports -0.4% (Weaker than expected after yesterday’s trade figures)
· Government -0.9%, weakness in defense structures and equipment investment
· Inventories fell $8.1bn, cutting 1.16% from growth
Bottom line: GDP growth was weaker than expected. Revisions smoothed some residual seasonality out of 2015, but the pattern of growth in 2014 looks bizarre, with GDP swinging from -1.2% to 5.0% in two quarters. Since that 5.0% growth rate was notched in Q3-14, growth has slumped to the vicinity of 1% in the last three quarters.
It’s hard to guess what the Fed will make of this report. Growth is weaker than they thought, but because job growth was not revised, it also means productivity is weaker than we thought. Don’t be surprised if John Williams is out within the next week telling us the new growth speed limit is less than 1%.
Others at the Fed are more likely to come to the conclusion the primary observation in the June statement—the economy is improving—is no longer true, however. On balance, the case for a hike has diminished considerably.
Finally, the combination of blockbuster durable-goods spending, falling imports and the rare drop in inventories suggests there was fire-sale level discounting in the second quarter, which is not encouraging for future growth. It does, however, help explain why retail earnings were as poor as they were.