Wednesday, August 29, 2012
This morning’s positive revision to second quarter GDP growth may not do much to give stocks a strong enough directional nudge. Investors seem to be either on vacation or waiting for what Bernanke has to say this Friday in his Jackson Hole speech.
Next week’s important economic reports, ranging from manufacturing ISM to August non-farm payrolls, will help provide enough guidance about the course of Fed policy even Bernanke is less than explicit in his Friday speech.
In its second read on the second quarter of 2012, the Commerce Department reported that the U.S. economy expanded at a 1.7% pace, up from the 1.5% growth pace originally reported. Consumer spending improved relative to the first look, and Federal government spending dropped less than was originally estimated, partly offset by a lower growth in investments. The revision is in-line with what the market was expecting and may not do much get the market out of its tentative mood of recent days.
Personal consumption expenditures (PCE), or consumer spending, which accounts for close to 70% of the economy, increased by 1.7%, compared to the 1.5% increase originally reported and 2.4% increase in the first quarter. Spending on durables was unchanged in the second read (down 1%) compared to the strong 11.5% growth in the first quarter.
Spending on non-durables improved in the second read – up 0.5% vs. the drop of 1.5% in the first read. Spending on services (a much bigger piece of consumer spending) was revised high – up 2.4% vs. up 1.9% in the first read and the first quarter’s 1.3% increase. The improvement in the services outlays is perhaps the most positive aspect of this report.
The investment picture remains worrisome as the growth rates were further revised down. Non-residential fixed investment increased at a lower pace than was originally estimated (4.2% vs. 5.3%) and down from the first quarter’s 7.5% pace.
Outlays on non-residential structures improved in the second read, while spending on equipment and software was revised down, compared to the pace of the first quarter’s 5.4% rate. Residential fixed investment was also modestly revised down in the second read — 8.9% vs. 9.7% — and remains below the first quarter’s 20.5% growth pace.
???Federal government spending dropped, but at a lower pace than was originally estimated – down 0.1% vs. down 0.4% in the first read and the drop of 4.2% in the first quarter. Changes in inventories became a drag on growth in the second read instead of the net positive contribution in the first read. Final sales of domestic product, which is basically GDP excluding inventories, increased at a 2% pace in the second read, up from the first read’s 1.2% pace and the first quarter’s 2.4% pace.
Today’s second-quarter GDP revision does not materially change what we had seen the first time around, but the growth upgrade is nevertheless a net positive. The deceleration in corporate investments is a worrisome sign and likely reflective of the uncertain domestic and international backdrop.
The upgrade in consumer spending is welcome, but still remains below the prior-quarter’s pace. In the absence of a material improvement in the labor market, it may not be reasonable to expect any acceleration in household spending. This means that expecting quarterly GDP growth rates in excess of 2% may be on the optimistic side.
Sheraz Mian
Director of Research
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