By Dr. Chuck Lieberman, Co-founder and CIO
This morning’s Q2 GDP came in at 6.5%, well below the 8% or higher that was expected. But digging into the details shows strong underlying demand and sets the stage for ongoing solid growth.
1. Consumption +11.8%. Services rose 12.0%, a sharp rise from Q1.
2. Nonresidential capital investment rose 8.0%. Structures actually declined at a 7.0% annual rate, while investment in equipment rose 13% and intellectual property grew 10.7%.
3. Residential investment actually declined 9.8% in Q2. Seemingly, labor scarcity is holding back construction activity and this should ease over time.
4. Government spending declined 1.5%, another drag on the economy that is unlikely to continue. (Federal spending declined, while state and local rose.)
5. Inventories were a major shocker. After declining by a sharp $74.4 billion in Q1, significantly slowing growth, inventories declined even more sharply in Q2, by $146.6 billion, accounting for around half of the “miss” in GDP relative to expectations. This is a greater decline than in Q2 2020 during the pandemic shutdown and it is simply unsustainable. The inevitable rebuilding of stocks ensure that growth will remain robust through the entire second half of the year and possibly even into the early parts of 2022.
6. Consumer inflation came in very hot at 6.4%. With bottlenecks holding back growth in Q2 (and possible also a factor in Q1), inflation pressures are likely to remain pretty firm for a number of quarters, which raises questions whether all of the surge can be considered transitory.
7. Final demand was very strong, but production couldn’t keep up, so a sizable portion of the difference was satisfied by depleting inventories. This is unambiguously unsustainable, but it also stretches out the period of above normal growth as supply revs up to meet demand. It also implies there are meaningful limits to how fast a mature, advanced economy like the U.S. can possibly grow without demand spilling over into inflation. Growth needs to moderate to avoid such an outcome. If the new spending programs now before Congress are passed, it will take longer to alleviate the economy’s bottlenecks and inflation pressures will continue for a longer time period.
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