2Q2016 Gross Domestic Product: First (Advance) Estimate

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In its first (“advance”) estimate of 2Q2016 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) pegged growth of the U.S. economy at a seasonally adjusted and annualized rate (SAAR) of +1.21%, up 0.38 percentage point from a downwardly revised 1Q. That 2Q rate was below the bottom end of expectations (+2.2%; consensus: +2.6%). Moreover, 2Q2016’s year-over-year growth rate was +1.23%, slower than 1Q2016’s +1.57%.

Overall, groupings of GDP components show that personal consumption expenditures (PCE) and net exports (NetX) contributed to 2Q growth. Private domestic investment (PDI) and government consumption expenditures (GCE) detracted from it.

The most notable item in the report was the continued contraction of commercial fixed investment, which subtracted 0.52% from 2Q's headline growth rate (-0.37% from 1Q). This was the third consecutive quarterly decline for fixed investments. Inventories also contracted for a fifth consecutive quarter; inventory destocking subtracted 1.16% from the headline, a 0.75% deeper drag than in 1Q.

Positives in the report were concentrated almost entirely in consumer spending. Consumer spending on goods rebounded from a couple of soft quarters to boost the headline by 1.45 percentage points (+1.20% from 1Q). Spending on services also contributed 1.38% (+0.52% from 1Q), although over one-third of that was in health care. Combined spending on goods and services provided a gross 2.83% of the headline annualized growth rate. 

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Consumer Metrics Institute provided a fairly terse summary:

This report shows a U.S. economy moving forward with a lackluster 1.21% growth rate. It also contained downward revisions to the prior four quarters.

Recapping the key items in this report:

-- Private commercial investment contracted for the third consecutive quarter.

-- Improved consumer spending growth was the only redeeming part of the report.

-- Most of the increased consumer spending came from decreased household savings.

Although this report is net (and mildly) positive, the increased consumer spending masked considerable commercial weakness.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.