Q2 GDP Revisions Indicate Higher Growth Due to Unexpected Increase in Personal Consumption

Revised Q2 GDP Indicates Stronger Growth

Shortly after Dollar General, a discount retailer, reported disappointing earnings, the Bureau of Economic Analysis (BEA) released its first revision of the Q2 GDP. The revision suggests that the US economy grew more robustly than initially expected, primarily due to an unexpected increase in personal consumption. The Q2 GDP was revised to 3.0% from the initial estimate of 2.8%, surpassing estimates of a 2.8% print. This growth is more than double the 1.4% growth reported in Q1.

Surge in Personal Consumption

The growth was largely driven by a significant increase in personal consumption, which rose by 2.9%, up from 2.3% in the initial estimate. This increase significantly exceeded consensus estimates of a 2.2% print. This surge in consumption comes despite Dollar General's recent bleak outlook, which cited a financially constrained core consumer, essentially referring to the dwindling US middle class.

Breakdown of GDP Components

The BEA reports that the Q2 increase was primarily due to increases in consumer spending, private inventory investment, and business investment. Imports, which subtract from the GDP calculation, also increased. The increase in consumer spending was driven by increases in both services and goods. The leading contributors to the increase in services were healthcare, housing and utilities, and recreation services. The increase in goods was led by gasoline and other energy goods, furnishings and durable household equipment, and recreational goods and vehicles.

Revisions in Other GDP Components

Despite the surge in personal spending, every other GDP component was revised lower. Personal consumption contributed 1.95% to the GDP, up from 1.57% in the initial estimate. Fixed Investment was revised slightly lower, to 0.64% in the second revision from 0.53% a month ago. The change in private inventories was also revised slightly lower, from 0.82% to 0.78%. Net trade detracted more from the bottom line print, with exports less imports reducing GDP by -0.77%, a slight deterioration from -0.71% initially reported. The contribution from the government was also revised lower, to 0.46% from 0.53%.

Price Increases and Rate Cuts

The BEA also reported that prices rose more than expected in Q2, up 2.5%, versus estimates of 2.3%, and down from 3.4% in Q1. Core PCE dipped slightly from the 2.9% initially reported, to 2.8%, and also down from 3.7% in Q1. Given the unexpectedly strong spending data and the continued decline in initial claims reported earlier, a 50bps September rate cut seems unlikely.

Market Predictions and Fed Actions

UBS trader Simon Penn commented on the numbers, stating that while the market is pricing 100bp of cuts in the remaining three FOMC meetings of 2024, the economy probably only needs 50bp to recalibrate policy to the appropriate stance. He believes that "the Fed is likely to deliver 75bp to avoid causing a market upset and to ensure it stays ahead of the growth curve." Penn also noted that the upward revision to Q2 GDP might be somewhat rearview but back in June, the FOMC said the economy was sufficiently robust to switch the dot plot from 75bp of cuts to 25bp.

Bottom Line

The UBS bottom line is that "yes, the US economy has slowed, but not to the extent the Fed should be very worried. It seems likely the Fed will cut too much this year (members like Bostic are talking about this concern) but that will mean fewer cuts next year. Yields should be higher and the curve should be bear steepening." This analysis provides food for thought. What are your views on this matter? Do you agree with the UBS assessment? Share this article with your friends and discuss these economic trends. Don't forget to sign up for the Daily Briefing, which is available every day at 6pm.