Next week features only a few, second-tier Canadian indicators—wholesale trade and Canada’s “other” labour market report. So attention will be on US data which is headlined by Friday’s Q2 GDP release. Normally, the first cut of US GDP would have important policy implications, especially in the week ahead of an FOMC meeting. But with markets now fully anticipating a 25 basis point cut on July 31 (and even pricing in some odds of a 50 basis point reduction) it’s hard to envision an upside surprise on GDP that would have the Fed hold rates steady. In fact, this report should highlight that a rate cut is less about the state of recent economic data and more about providing insurance against trade tensions and slowing global growth (better embodied in sentiment data and activity indicators abroad).
Consumer spending was the standout performer in Q2. This week’s data confirmed US core retail sales grew at an 8% annualized rate in the quarter, the best pace since 2005. This will contribute to household spending rebounding to a 3.8% pace, among the best gains in recent years and sufficient to dispel any concerns about the health of US consumers following a slow start to the year. Residential investment likely returned to the positive column after declining in seven of the last eight quarters (the worst stretch since the recession). Stronger resale and homebuilding activity were the supports there. Business investment should have posted a modest gain with capex shipments rising in the quarter but new orders generating concerns about Q3. All told, domestic demand is expected to post a 3.4% gain, the strongest in a year.
Headline GDP growth will be less impressive—we expect a 2.2% annualized increase as inventories swing from Q1 add to Q2 drag (i.e. some of the increase in Q2 spending came out of goods produced in earlier quarters and thus doesn’t count toward Q2 output). Net exports, which provided a nice add in the previous quarter, will have subtracted modestly from growth. The end result should be the opposite of Q1 when headline growth was strong but domestic spending soft. Again, this won’t be a report that explains why the Fed looks set to lower interest rates the following week, though it could lead those looking for a 50 basis point cut to reassess.