GDP

July 26, 2019

The preliminary estimate of second quarter GDP growth came in 2.1% compared to a first quarter GDP growth of 3.1%.  Thus, GDP growth in the first half of this year averaged a solid 2.6%  For 2018 as a whole GDP rose 3.1%.  We  expect GDP growth of 2.7% in 2019.

Final sales, which is GDP excluding the change in business inventories rose 3.0% in the second quarter after having risen 2.6% in the first quarter.   Over the past year final sales have risen 1.8%.  In the second quarter inventories rose $71.7 billion after having jumped $116.0 billion in the first quarter. Thus, inventories  subtracted 0.9% from GDP growth in the second quarter.  Inventories are expected to rise  roughly $65 billion per quarter in the final two quarters of the year.

Final sales to domestic purchasers excludes both the change in inventories and trade rose by 3.5% in the second quarter after having risen 1.8% in the first quarter.  In the second quarter the deficit for net exports widened by $34.7 billion from $944.0 billion to $978.7 billion.   In that quarter exports declined 5.2% while imports rose 0.1%.  Given that final sales to domestic purchasers rose 3.5% while final sales rose 3.0%,  it is clear that the trade component subtracted 0.5 from GDP growth in the second quarter.  Over the past year this series has risen at a 2.3% pace.

Consumption spending jumped 4.3% in the second quarter after having risen 1.1% in the first quarter.  Steady employment gains of about 180 thousand per month continue to boost  income.  The consumer has little debt.  And interest rates remain relatively low.  Everything related to the consumer seems quite solid.  We expect growth in consumer spending of 2.7% this year.

Nonresidential investment fell 0.8% in the second quarter after having risen 3.2% in the first quarter.  For 2018 nonresidential investment climbed 5.9%.  We expect nonresidential investment to  increase  2.6% in 2019 as uncertainty about GDP growth in the second half of the year both for the U.S. and non-U.S. has caused business leaders to become more cautious.  If we are right that GDP continues at a respectable pace in the second half of the year, investment spending should resume a more rapid rate of growth.

Residential investment fell by 1.5% in the second quarter after having declined 1.0% in the first quarter.   But sales appear to leveling off after a long slide.   While demand for housing remains robust,  builders are having a difficult time finding qualified workers which curtails growth in this category.   Nevertheless, we expect residential investment to decline 0.2% in 2019.

The foreign sector as measured by the deficit for real net exports,  widened by $534.7 billion in the second quarter from $944.0 billion to $978.7 billion.   In that quarter exports fell 5.2% while imports rose by 0.1%.  We expect the deficit to widen slightly for the balance of the year.  If that is the case the trade component will subtract 0.2% from GDP growth in 2019.

Federal government spending jumped 7.9% in the second quarter after having risen 2.2% in the first quarter.  We expect Federal government spending to rise 4.0% this year as defense spending rises sharply while non-defense spending climbs by a moderate amount.

Following GDP growth of  3.1% in 2018 we expect growth of  2.7% in 2019.

Stephen Slifer

NumberNomics

Charleston, SC