GDP Q2 bounced back to a trend-like 2.6 percent with the help of solid consumer spending and business investment. Flagging inflationary pressures continue to challenge current FOMC dot-plot expectations.

Second Quarter Bounce Back: Real Final Sales Solid

After the perennial residual seasonality issues and despite a negative inventory contribution, second quarter GDP returned to trend at 2.6 percent, annualized.

- advertisement -

Underlying momentum for the economy is better gauged by real final sales to domestic purchasers, which came in at 2.4 percent, a reflection of solid consumer spending and continued business equipment spending (top graph). The gains in consumer spending reflect the gains in disposable personal income of 3.2 percent. Spending for durables and nondurables were areas where consumer spending rebounded most notably. Business equipment also contributed to growth at a moderate pace of 8.2 percent, consistent with core capital goods shipments. Core capital goods shipments and orders have been on an improving track, and with business leaders still optimistic that some progress can be made on the fiscal policy front, the outlook for business investment remains constructive.

Structures, government and net exports all added to GDP growth. Moreover, residential investment corrected from the favorable weather induced fast pace of the first quarter when activity was clearly pulled forward. Looking forward, the outlook for residential construction remains constructive as long as the labor market, including wage & salary growth continues to show improvement.

Inflation Remains Tame

Inflation, as measured by the PCE deflator, has registered soft performances over the prior four months and has grown just 1.6 percent, year over year (middle graph). The figure reinforces the view that the price environment exhibits little upward momentum as we enter the second half of the year. The FOMC will have to grapple with flagging price pressures as they assess the appropriate path for monetary policy. There is a lot of runway left before the December FOMC meeting where we believe the Fed may be in position to hike interest rates again, but a return to a quickening pace of inflation is critical to that call.

Outlook Going Forward

In the first half of the year, GDP growth has averaged just 1.9 percent. Looking ahead to the second half of the year, we expect GDP to accelerate slightly, averaging 2.5 percent. Continued job gains (bottom graph) along with signs that real disposable income is accelerating is supportive of our view of stronger consumer spending in the second half of the year. Global economic data has been surprising to the upside, suggesting that domestic business investment is also likely to slowly accelerate in the second half of the year. Should our forecast for H2 hold, year-over-year GDP growth should expand at a 2.2 percent pace in 2017, faster than the 1.5 percent rate observed in 2016.

Previous articleEURCHF Rallies Sharply But Overbought RSI Could Weaken Bullish Bias
Next articleTrade Idea: USD/CAD – Sell at 1.2690
Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A, Wells Fargo Advisors, LLC, and Wells Fargo Securities International Limited. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company © 2010 Wells Fargo Securities, LLC.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.