Rosy GDP report sets stage for strong second-half growth
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Today’s revision to second quarter real Gross Domestic Product (GDP) showed that the economy grew a little faster than originally estimated in the spring. Economic activity advanced at a 3.0-percent annualized rate in the second quarter (versus the initial estimate of 2.6 percent), a nice bounce after the sub-par 1.2-percent increase recorded in the first quarter of the year.

Even though the data are seasonally adjusted, GDP has had a tendency to be softer than the underlying trend in the first quarter in recent years and then to make up for the shortfall in the spring and/or summer. Thus, the right way to think about these data is probably to average the first two quarters of the year.

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As it turns out, GDP growth in the first half of 2017 averaged 2.1 percent, pretty much exactly the average over the course of this expansion, going all the way back nearly a decade. Thus, a cursory read of the data would suggest that the economy continues to plod along on a 2-precent growth path, consistent with what we have seen for years.

 

In fact, the underlying composition of activity in the spring in particular and first half of the year more generally is encouraging for the possibility of a pickup in growth going forward. Consumer spending was quite strong in the spring, increasing at a 3.3-percent pace, making up for a disappointing 1.9-percent gain in the first quarter.

The average for the first half of 2.6-percent growth in real consumer spending is pretty close to last year’s clip and is quite solid. As long as the labor market remains strong, generating substantial net hiring and nudging wage hikes higher, households will likely continue to spend at a healthy pace.

Business investment spending has been a laggard through most of this expansion but appears to be perking up this year. A revival in domestic energy production has contributed, but the big improvement so far this year has come in outlays for business equipment. This category posted an outright decline in 2016, as firms waited to see the election results and how the economy might play out post-election.

Going into 2017, business confidence jumped, likely reflecting optimism that regulatory policy would be less restrictive and, more importantly, that corporate tax reform might finally be passed. I suspect that what we are seeing now in terms of stronger equipment investment is merely a trickle of the pent-up reservoir of spending that could gush if a well-crafted corporate tax reform were to actually be enacted.

While consumer and business spending increased at a healthy pace in the first half of the year, inventories barely moved, an unusual development, as inventories usually rise in proportion to sales. This result actually subtracted more than half a percentage point from average real GDP growth in the first half of the year. Thus, if consumer and business spending hold up for the balance of the year and firms build their inventories at a relatively normal pace, real GDP growth in the second half of the year could accelerate to 3 percent or better.

Today’s news on GDP is without question good news for the economy. Activity expanded faster in the spring than initially expected, and the composition of GDP in the quarter bodes well for continued strength over the rest of the year. Recent events will create temporary problems for the economy, as the flooding from Harvey is a terrible tragedy and will put a dent in activity in the Houston area for a while.

However, history tells us that once rebuilding kicks in, the net impact of disasters on national GDP tends to be small and short-lived (even Katrina had no more than a fleeting effect on GDP growth), so we should still be on track for a solid economic performance through the rest of the year.

Stephen Stanley is the chief economist for Amherst Pierpont Securities, a broker-dealer providing institutional and middle-market clients with access to fixed-income products.


The views expressed by contributors are their own and not the views of The Hill.