Markets

How Good is the GDP Report? - Real Time Insight

The GDP reading is better than expected, but the report's internals point to worrisome trends that do not look very favorable for growth outlook in the coming quarters. Also, the report may not be QE-friendly, as it gives QE opponents on the FOMC enough ammunition to stop Bernanke from doing more, even if he wanted to.

Here are the details -

The U.S. economy expanded at a better than expected 1.5% pace in the second quarter, down from the first quarter's 2% growth rate (revised upwards from the original 1.9% rate). While 'headline' growth rate and some key aspects of the report's internals came in better than expected, they nevertheless represent a decelerating trend in the economy's growth profile.

Personal consumption expenditures (PCE), or consumer spending, which accounts for close to 70% of the economy, increased by 1.5%, compared to the 2.4% increase in the first quarter. Households spent less on durables, which dropped 1% after the strong 11.5% growth in the first quarter. Spending on non-durables modestly declined (1.5% vs. 1.6%), while spending on services (a much bigger piece of consumer spending) increased from 1.3% in the first quarter to 1.9% in the second quarter.

The pace of investment growth also decelerated, with non-residential fixed investment increasing at 5.3% vs. 7.5% in the first quarter. Non-residential structures barely increased (up 0.9% vs. the 12.9% increase in the first quarter), while outlays on equipment and software increased at a 7.2% pace compared to the first quarter's 5.4% rate. Residential fixed investment decelerated from the first quarter's 20.5% pace to 9.7%.

Federal government spending dropped, but at a much lower pace than was the case in the first quarter (down 0.4% vs.4.2%), while spending by state and local governments also dropped at a modestly lower rate (down 2.1% vs. down 2.2%). Net exports were a relatively bigger drag compared to the first quarter, while inventories were a net contributor instead of a drag as in the first quarter. Final sales of domestic product, which is basically GDP excluding inventories, increased at 1.2% rate in the second quarter, half of the first quarter's 2.4% pace.

This GDP report is not materially different from the same report a year ago that showed a roughly similar growth pace in the second quarter of 2011. We all know that the economy accelerated from that point onwards and ended the year at a solid 3% growth pace in the fourth quarter. Many are likely hoping for a repeat of that performance this year as well, reflected in the +2% consensus growth expectation for the third quarter and beyond.

But we should keep in mind that last year's Q2 GDP print followed a much slower growth pace in the first quarter. This morning's GDP report and a host of other economic readings are pointing to the opposite trend relative to what last year's Q2 GDP report represented - the economy is decelerating instead of accelerating.

The international backdrop may not be much different from what the U.S. economy encountered last year, though one has to say that the key emerging markets are clearly slowing down and that Europe may have reached a critical phase in its long running drama. But more significant is the unsettled domestic backdrop, with uncertainties about fiscal policy resulting from the Fiscal Cliff expected to shave off approximately half a percentage point from GDP growth.

As such, it is perhaps reasonable to be skeptical of current consensus expectations for second half economic growth. Given the tone of recent economic reports, I would expect GDP growth expectations for the second half to be trending lower in the coming days and weeks. With earnings expectations already coming down, it is hard to envision stocks making much headway in a decelerating GDP backdrop.

What's your take on the economy - is it moving up or going down? And what does that mean for the market?

To read this article on Zacks.com click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Other Topics

Stocks

Latest Markets Videos