The US economy grew by 2.6% in Q2, one tenth less than expected but off a slower than expected base as Q1 was revised down by two tenths to 1.2% (big drag from inventories). Of note was the miss in nominal GDP as a lower than expected deflator added 3 tenths. Nominal GDP was up just 3.6% after a 3.2% gain in Q1. The estimate was 4% for Q2. Personal spending rose 2.8% as expected and mostly driven by spending on durable goods (autos fell but the ‘recreation’ category saw a sharp gain) while Q1 spending was revised up by a sharp 8 tenths to growth of 1.9%. Spending on services was up more modestly but healthcare and housing/utilities continues to take a growing share of consumer spending. Capital spending overall added 3 tenths with spending specifically on equipment contributing 4 tenths but tech spending and intellectual property cap ex barely contributed to growth. Residential construction was a drag while non residential ‘structures’ added one tenth. After a large draw in inventories in Q1, inventories were basically flat in Q2. Trade added two tenths to growth with exports up and imports down. Government spending added one tenth as spending on national defense offset a drop in other federal and state/local spending. Real final sales, taking out the influence of inventories, were up by 2.6% vs 2.7% in Q1.
Bottom line, on a y/o/y basis US growth was 2.1% vs 2% in Q1 with both off easy comparisons from 2016 when growth in Q1 2016 was just 1.4% and was followed by 1.2% in Q2 2016. I’ve used the adjective ‘mediocre’ many times to describe US growth and that remains the same. Punk productivity remains the main reason. As for the Fed’s reaction, there won’t be much and I still expect QT to begin in September. Treasury yields fell a hair in response while the US dollar has weakened further and sits at the lowest level in 14 months. The dollar index is now just less than 1 pt from the lowest level since January 2015, right after QE3 ended. Gold is now at a 6 week high and has a lot to go on the upside if this dollar weakness persists considering net spec longs in gold are the lowest in 18 months.
With the Fed’s eyes closely on wages, the Employment Cost Index for Q2 was up by .5% q/o/q, one tenth less than expected and was up 2.4% y/o/y. Looking straight at private sector wages/salaries saw them up 2.4% vs 2.6% in Q1 and 2.3% in Q4. What did pick up in pace was the 2.2% increase in Benefits which is the most since Q1 2015.
Bottom line, we keep waiting for the aggregate pickup in wages and it was not reflected in these figures but some of this is mix. There is little question that certain areas of the labor market (low skilled and high skilled) are seeing more notable wage gains. The numbers with everyone else could be influenced by more younger people entering the labor force at this stage of the cycle who get paid less vs baby boomers retiring who get paid more.