2Q2018 Gross Domestic Product: First (“Advance”) Estimate

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In its advance (first) estimate of 2Q2018 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 +4.06% (4.2% expected), up 1.84 percentage points (PP) from 1Q2018’s +2.22%.

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 2Q2018 was 2.84% higher than in 2Q2017; that growth rate was slightly faster (+0.26PP) than 1Q2018’s +2.58% relative to 1Q2017.

Three groupings of GDP components -- personal consumption expenditures (PCE), net exports (NetX), and government consumption expenditures (GCE) -- contributed to 2Q growth. Private domestic investment (PDI) detracted from growth to a very minor degree.

The BEA’s real final sales of domestic product growth, which excludes the effect of inventories, was reported to be +5.07%, up by a substantial 3.12PP from 1Q. 

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This report reflected the BEA’s annual revisions to historical data -- this time, back to 1929 -- and changing the index year from 2009 to 2012. The net effect of those changes boosted estimates of total GDP by an average of 4.9% between 1Q1947 (+$98.5 billion in chained 2012 dollars) and 1Q2018 (+$952.1 billion).

The average QoQ growth rate for the past four quarters was revised materially upward (+1.89PP); from 1Q2008: +1.50PP. Corresponding YoY revisions were comparatively small, however (respectively: -0.1PP and 0.0PP), which demonstrates how annualizing QoQ changes amplifies volatility. Apparently, then, revisions primarily consisted of shifting growth from one quarter to another.

During 2Q2018 the growth rate for total consumer spending was reported to be 2.70%, up 2.34PP from the revised 1Q rate. Inventories subtracted 1.00% from the headline (-1.27PP from 1Q), while the growth rate in commercial fixed investment rose by a nearly offsetting +0.94% (but still 0.40PP below 1Q). Exports added 1.12% (+0.69PP relative to 1Q) to the headline while the subtraction from imports (-0.06%) nearly abated (+0.39PP relative to 1Q). The contribution from government expenditures (+0.37%; +0.10PP from 1Q) was concentrated in defense spending.

“A headline number showing +4.07% growth makes us want to break into a boisterous refrain of Happy Days are Here Again,” wrote Consumer Metric Institute’s Rick Davis, “Some will undoubtedly claim that the Tax Cuts and Jobs Act of 2017 is making America great again. And the BEA's … real final sales growth was reported to be +5.07% -- a number that some might consider to be unsustainably high or an early indication of an overheating economy. At minimum it signals that the Fed's accommodations over the past decade are no longer needed.”

“While we are pleased to find the economy growing far faster than we had previously expected,” Davis concluded, “the historical revisions leave us with a sense of unease.”

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.