2Q2019 Gross Domestic Product: First (“Advance”) Estimate

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After annual revisions spanning back through 2014, the Bureau of Economic Analysis (BEA) pegged its advance (first) estimate of 2Q2019 U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate (SAAR) of +2.05% (1.9% expected), down 1.05 percentage points (PP) from 1Q2019’s +3.10% (previously 3.12%).

On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 2Q2019 was 2.29% higher than in 2Q2018; that growth rate was slightly slower (-0.36PP) than 1Q2019’s +2.65% relative to 1Q2018.

Two groupings of GDP components -- personal consumption expenditures (PCE) and government consumption expenditures (GCE) -- contributed to 2Q growth. Private domestic investment (PDI) and net exports (NetX) detracted from growth. This report reversed several trends. For example:

PCE – After decelerating for three consecutive quarters, consumer spending “came roaring back” in 2Q, contributing 2.85PP -- the most since 4Q2017 -- to the headline number. Spending on motor vehicles and RVs dominated this category.

PDI – Drop-offs in the value of private inventories and spending on nonresidential structures flipped private domestic investment into contraction after three quarters of expansion. Residential investment spending also exerted a minor drag on PDI.

NetX – A drop in exports and rise in imports pulled net exports “into the red.”

GCE – Spending at both the federal and state/local levels boosted this category’s contribution to the headline.

The BEA’s real final sales of domestic product growth, which excludes the effect of inventories, rose to +2.91%, up 0.34PP from 1Q2019. 

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“We are not quite sure what to make of this new report,” wrote Consumer Metric Institute’s Rick Davis, “primarily because it singularly reverses a number of trends that were very noticeable over the course of the past year. With that in mind, and at face value, the key takeaways from this report for 2Q2019 are as follows:

-- The much lamented demise of the consumer sector seems to have been premature. Combined spending on goods and services provided more growth (+2.84%) than the net headline number. The improvement in disposable income and the decrease in savings have likely fueled this spending surge -- reflecting improving household sentiment.

-- Commercial spending on fixed investment, which had materially supported the headline number for the past year, slid into contraction for the first time since 2015.

-- Inventories did their "thing" -- flipping sharply into negative territory. This is mean reversion at its very best. But arguably it is the flip side of the improvement in consumer spending. And it brings to mind that inventory draw-downs are the ultimate mixed message -- demonstrating caution on the part of inventory holders while simultaneously offering an encouraging long-range future to manufacturers.

-- Government spending soared, with all of the increase in Federal non-defense spending. [Federal spending, of which non-defense was indeed the lion’s share, was actually 60% of the total.] This is likely related to a time-shifted spending from the extended "shutdown" -- although the "shutdown" itself (as expected) resulted in no material reduction in spending.

-- Foreign trade also flipped, dropping the headline by -0.64pp after adding +0.72pp in the prior quarter, a -1.36pp quarter-to-quarter swing.

-- The BEA's deflator is now substantially higher than the CPI-U reported by the BLS, resulting in a materially more pessimistic growth rate than might otherwise have been reported -- reversing yet another trend.

-- The 22 quarters of historic revisions were, as a whole, relatively benign -- averaging an upward +0.02PP per quarter. However the immediately preceding four quarters took a beating, with 4Q2018 dropping by a material -1.07pp.

"Over the years we have come to expect that the revision process will reduce the growth reported in the relatively recent past. That raises the obvious question: Is the BEA's data collection process naturally biased to optimism on a quarter by quarter basis? Or is it just good bureaucratic policy to bury some of the negative stuff in the revisions that nobody really looks at?

"It is plausible that the BEA's survey based approach introduces a short-term survivor bias in their reports -- a phenomenon also observed in employment data. Non-responding survey participants are assumed to still be operating, and their prior responses are simply carried forward. Eventually the dead entities get weeded out, but not before the earlier assumptions about them creates a short term survivor bias.

"We certainly hope that the bias is procedural, and not bureaucratic policy," Davis concluded. "And if it is procedural, we might point out that this is the 21st century -- with even tradition bound Major League Baseball embracing instant replays and experimenting with robots calling balls and strikes. Surely we should expect the BEA to be doing much better."

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.