Strong Data on the Economy Before the Impact From Harvey Appears
Revised estimates from the Bureau of Economic Analysis show the U.S. economy grew at a 3.0 percent annual rate in the second quarter, better than the initial estimate of 2.6 percent. There were upward revisions to core components of gross domestic product including consumer spending, business fixed investment, and housing, while exports and government spending were revised lower. Price indexes were essentially unchanged from the prior estimates, and the rate of increase remains very low.
Also announced today, ADP, the payroll processor and HR-services firm, estimated that private payrolls added 237,000 jobs in August, a very strong result. The government tally for payrolls will be released by the Bureau of Labor Statistics on Friday. Together, these data paint a picture of an economy with very solid momentum. That momentum may take a hit from the impact of Hurricane Harvey, which has been devastating the Texas and Louisiana coasts. Beyond the terrible loss of life, measures of economic activity are also likely to reflect the impact over the next few months as sales and output are likely to be restrained while some prices such as energy may spike. Beyond that initial drag, economic-activity measures are likely to get a boost from the cleanup and rebuilding efforts. Both the negative impacts and the subsequent positive impacts are likely to flow though into the AIER leading indicators. Caution should be exercised when interpreting these distortions over the next several months.
Among the key revisions to second-quarter GDP, consumer spending, or personal consumption expenditures (PCE), rose at a revised 5.9 percent rate in the quarter, up from just 0.7 percent in the first quarter. Spending on durable goods rose 8.9 percent, and spending on nondurables rose 4.3 percent. Both grew at a faster pace compared to the first quarter, and both had upward revisions from the initial estimate. Spending on consumer services rose 2.1 percent, down from 2.5 percent in the first quarter but higher than the initial estimate of 1.9 percent.
Business fixed investment decelerated to a 6.9 percent pace of growth in the second quarter from 7.2 percent growth in the first quarter as spending on structures rose 6.2 percent, equipment investment accelerated to 8.8 percent growth, and investment in intellectual-property products rose at a 4.9 percent pace. Residential investment, housing, fell at a 6.5 percent annual rate in the second quarter, well below the 11.1 percent gain in the first quarter but slightly better than the 6.8 percent decline from the initial estimate.
Combined, consumer spending, business investment, and housing rose at a very solid 3.4 percent annual rate in the second quarter, the fastest pace since 2015.
Real exports rose at a 3.7 percent rate in the second quarter while imports increased at a 1.6 percent pace. The net trade balance resulted in a contribution of 0.2 percentage points to real GDP growth in the quarter, the same as the initial estimate. Real government expenditures fell 0.3 percent in the quarter and subtracted about 0.1 percentage points from overall growth.
Price indexes increased at a very moderate pace in the second quarter, with the GDP price index gaining 1.0 percent at an annual rate while consumer prices (the PCE price index) increased at just a 0.3 percent annual pace. Over the past four quarters, the GDP price index rose 1.6 percent while the PCE price index also increased 1.6 percent. Excluding the volatile food and energy components, the core PCE price index increased 1.5 percent over the past four quarters.
Overall, second-quarter real GDP looks better in the revised estimate with stronger growth and still-moderate price increases. The ADP report suggests the labor market remains robust and is likely to support ongoing economic expansion though the impacts from Hurricane Harvey may distort data over the next several months.
Robert Hughes
Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.
