Amid all the data and decisions around the world last week, one stood out – the first estimate of US second quarter GDP, and an associated set of revisions to past GDP figures that throws into question the need for a US rate rise.
The figures showed that US year on year growth has tumbled from 3.3% at the start of 2015 to 1.6% in the first six months of this year. And that raises further queries about the Fed’s increase last December and the timing of any increase this year.
This Friday’s jobs report though will be more important to the Fed and markets, along with this week’s monthly surveys of manufacturing and services which are expected to again show a solid rate of expansion.
But the GDP reports, especially the revisions, were on the whole not supportive of the need for any rate rise at all – last December and this year.
US GDP heading in the wrong direction?
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And for the Reserve Bank, it’s another positive towards a rate cut decision tomorrow.
The revisions and the first estimate for the second quarter of a sluggish annual growth rate of 1.2%, (which will almost certainly be changed with more data available in the next few weeks) which was sharply slower than the market forecast of 2.5% or 2.6%, tell us the US economy is still battling sub 2% growth.
Besides the weak June quarter estimate, the third March quarter estimate was trimmed back to 0.8% from 1.1% as statisticians at the US Bureau of Economic Analysis (BEA) found more problems with the way raw data is adjusted for seasonal fluctuations (something that has bedevilled economic data in Australia as well).
And, in what was a much bigger set of revisions seen for a while, the December quarter GDP estimate was cut by five-tenths of a percentage point to a 0.9%.
The BEA revised up the 2015 March quarter GDP growth estimate to a 2.0% annual rate from the previously reported 0.6% rate, but it also revised down the very strong second-quarter GDP estimate for the same year to a 2.6% rate from 3.9%.
So since the final three months of 2015, the US economy has been growing around 1% which suggests suggest a significant loss of momentum that puts the economy at the risk of stalling.
The year to growth rate had slid from 3.3% in the March quarter of 2015 to 1.6% in the same quarter of this year. That is not a sign of an economy enjoying strong economic growth sufficient to demand a rate rise from a toey Fed. But that is what happened in December.
The lower GDP miss came in part because of a tumble in inventories, which subtracted 1.16 percentage points. At the same time, consumer spending showed a robust 4.2%, the best for 18 months.
But the weakness (apart from the inventories) that was the more worrying for future growth was a 9.7% slump in investment, the third straight quarterly drop, as companies cut back on spending on structures, such as oil wells, equipment and inventories.
And in that fall, business investment fell 2.2% (also the third quarterly fall in a row). Residential investment also fell 6.1%, the first fall since the start of 2014.
Separately, the employment cost index, a Labor Department measure that is said to be watched closely by the Fed, rose at a 0.6% from the first quarter, in line with expectations and reflecting an annualised rise of 2.3%, meaning labour costs are not getting out of hand.
But while growth is expected to rebound in the second half, expansion for 2016 will probably fall short of 2%, which not a sign of an economy. The only positive was consumer demand, which was strong in the quarter on the first estimate.
It grew at an annual rate of 4.2% in the June quarter, up from 1.6% in the first three months of the year. Excluding inventories, GDP growth rose at a 2.4% rate and domestic demand increased at a 2.7% rate.
But late last week the head of Ford warned that the American car boom was over and from now on sales gains would be tough (They are running at a new record annual pace of 18 million). Car sales figures for July out this week are expected to show a fall in the annual rate of sales under 18 million vehicles.
If a big car maker is finding it harder to shift metal, then perhaps the inventory slide is precautionary by American manufacturers, importers and retailers worried about the outlook.
Certainly an imponderable of some size is the Presidential election campaign between Hilary Clinton and Donald Trump – the latter seems to be worrying more and more companies about the outlook.
