GDP in Q2 surprised to the upside with a 2.1% performance. The estimate was 1.8% and this brings the year to date average to 2.6%. Personal spending was the main catalyst as it grew by 4.3%, 3 tenths more than expected after a modest 1.1% gain in Q1. Spending on durable goods led the way as spending on services was more muted. Government spending also gave the GDP figure a big boost, of 9 tenths of a point, particularly led by non defense federal spending which spiked by 16%. State and local government spending was also strong. The drag on GDP was the investment side, trade and inventories. Spending on residential and non residential construction both fell. Spending on equipment was up slightly while spending on intellectual property continued to be a bright spot but some moderation from the strong prior two quarters. Exports fell 5.2% in response to the global slowdown in trade. Imports were flat. Inventories took 9 tenths off GDP which gives back and more the 5 tenths contribution in Q1.
Cutting thru some of the noise takes us directly to final sales to private domestic purchasers and here it grew 3.2% after a 1.6% gain in Q1, thus giving us an average growth rate of 2.4% year to date. The 2018 average was 2.8%.
Another thing of note was the price deflator. The price deflator grew by 2.4%, 4 tenths more than expected and that’s the most since Q2 2018. Core PCE was up 1.8% q/o/q, basically in line with the Fed’s target. We also got our first look at the comprehensive view of corporate profits and they fell for the 2nd straight quarter both pre and after tax. After tax profits fell 4.1% q/o/q.
Bottom line, the consumer and government spending drove all of the gain in GDP as trade, inventories and investment reversed the Q1 gains. We know the consumer has been what has been holding things up in light of the global slowdown in trade and manufacturing and that is thanks to a tight labor market and rising wages. On the question that everyone tries to answer in light of the longest economic expansion on record, when will we see the next recession, I again believe it will be determined by the direction of the stock market. The US manufacturing and trade side is essentially already in a recession offset mostly by the consumer.