There were several important reports on the economy released this morning. First, data from the Bureau of Economic Analysis (BEA) showed that U.S. gross domestic product (GDP) growth accelerated in the second quarter of 2016, albeit just barely. Specifically, real GDP, which measures the value of the production of goods and services in America adjusted for price changes (inflation), increased at an annual rate of 1.2 percent in Q2. That is up from the first quarter’s downward-revised 0.8 percent pace of expansion but significantly worse than the 2.6 percent consensus forecast and the third quarter in a row with sub-2 percent growth. Moreover, this soft GDP print goes against the pattern of a big second quarter rebound seen over the past few years, and altogether the average annual growth rate during the current business cycle is one of the lowest of any post-WWII expansion. Much of the weakness last quarter was due to continued inventory liquidation, which contributed -1.16 percent to GDP in Q2 and could remain a drag on growth in the rest of 2016. However, state and local government spending and residential fixed investment were also quite weak in Q2, subtracting 14 basis points and 24 basis points from GDP growth, respectively. Personal consumption (consumer spending), which accounts for more than two-thirds of economic output, expanded by 4.2 percent in Q2, the best gain since 2014 but again below the growth economists had expected. It is worth mentioning that this is only the first (advance) estimate of Q2 GDP growth, and it is therefore possible that the figure will be revised much higher down the road. Overall, though, this is a very disappointing report which suggests that the U.S. economy, even seven years after the “Great Recession” ended, has yet to achieve the breakout in growth seen in past recoveries.
Next, a report from the Bureau of Labor Statistics (BLS) showed that employment costs in America continued to grow at a somewhat elevated pace in the second quarter. Specifically, total compensation costs for civilian workers in Q2 2016 lifted by 0.6 percent, seasonally adjusted, in line with what economists had predicted and similar to the gains seen over the past year. Wages and salaries, which make up about 70 percent of compensation costs, also lifted by 0.6 percent last quarter, while benefits rose by 0.5 percent. Elsewhere in the report, year-over-year growth in U.S. private-sector wages excluding the volatile incentive pay component matched the fastest pace of the current business cycle in Q2, and cash compensation continued to rise faster than total compensation for all workers. The latter is a change from the years immediately following the “Great Recession” when benefits drove employee compensation growth. Altogether, this report provides more evidence of the growing bargaining power of labor which will continue to put upward pressure on wages in America.
Elsewhere, the consumer sentiment index from the University of Michigan ended July at 90.0, up from the mid-month reading but still down from 93.5 in June. Americans’ views of both current and future economic conditions deteriorated significantly this month, with the latter collapsing to a nearly 2-year low. The report's authors attributed the broad sentiment weakness to “increased concerns about prospects for the national economy,” but noted that most of this pessimism was found among higher-income households. That is not too surprising since this demographic group is more likely to have investments that are sensitive to macro shocks, e.g. Brexit. Richard Curtin, director of the Michigan Survey of Consumers, added that “Given the prompt rebound in stock prices as well as the tiny direct impact on U.S. trade, it is surprising that concerns about Brexit remained nearly as high in late July as immediately following the Brexit vote. While concerns about Brexit are likely to quickly recede, weaker prospects for the economy are likely to remain.” On a related note, the proportion of surveyed consumers who reported that they expect the country to have “continuous good times” over the next twelve months fell to the lowest level since September 2014 in July, and less than half of respondents said that they anticipate income growth in the year ahead.
Sources: Econoday, Twitter, Bloomberg, ZH, BEA, BLS, UoM, FRBSLPost author: Charles Couch