Better than expected
Second quarter GDP was revised slightly downward to 2% driven by weaker exports and corporate investments. This 2% number is significantly lower than the 3.1% growth rate we saw in the first quarter (remember much of the growth last quarter was driven by factors more short-term in nature like inventories and trade). The revision for the second quarter indicated stronger consumer spending, which grew at the strongest pace since 2014. Business investment, conversely, was weaker driven by uncertainty caused by geopolitical risks.
Moral of the story: The second quarter proved that consumers continue to be the engine of economic growth while businesses are standing at the sidelines waiting to see what comes of the trade war with China. Two months into the third quarter, the story seems unchanged.
Confusingly confident consumers
Despite trade wars causing concern for businesses and the wildly volatile month of August causing concern for investors, consumers remain optimistic as consumer confidence remains near a 19-year high. The composition of the index is worth noting as consumers believed the present situation to have improved while the outlook over the next six months seemed to have deteriorated.
Moral of the story: The headline consumer confidence number was a pleasant surprise to economists as the overall business environment would suggest deteriorating confidence levels. Some are speculating that consumers have become accustomed to the constant trade war with China or they are choosing to tune out the bad vibes as they enjoy the remaining weeks of their #whiteclawsummer.
Consumer spending increased as anticipated in July, driven by spending on recreational goods and vehicles and energy costs. Meanwhile, consumer incomes increased only modestly by 0.1%, which is the weakest growth rate in almost a year, meaning consumers had to dip into savings to cover expenses. Of note, the Fed’s core preferred inflation measure (PCE Index) increased slightly this month, rising to a 1.4% annual rate, which is still far below their 2% target rate.
Moral of the story: This consumer spending report is the epitome of what’s happening in the economy right now – consumers are still spending because of the strong labor market but businesses are starting to cut back, as evidenced by the lack of wage growth. Soon enough, the less optimistic business sentiment will flow into the labor market and then into consumer spending. All of this is definitely on the Fed’s radar, and the low inflation leaves room for another interest rate cut in September.