Conclusion: So, what do you do with a strong ADP print for July and a (expected) deceleration in a rearview looking 2Q13 GDP number within the context of the consumption and expectation dynamics highlighted below?
In part, you wait for tomorrow’s update to our favored, high frequency read on the Labor Market in the NSA claims data and then you wait again for Friday and the monthly exercise in speculation and data myopia that is the Employment report.
All in, as we highlighted in Monday’s Note - U.S. Growth - #TRENDing – with the research and risk management signals both still aligned on the pro-growth side, the path of least resistance here is to stick with the positive TREND slope of improvement in the domestic macro data until something changes.
Below is a review of this morning’s GDP data along with some summary commentary:
2Q13 REAL GDP: 1.7% QoQ (vs. revised 1.1% prior and 1.0% expected)
1Q13 Revision: Revised down to 1.1% from 1.8%
C: Consumption growing +1.8% QoQ, decelerating 50bps sequentially. Contributed 1.22% to Total GDP.
I: Investment growing +9.0% QoQ, accelerating +4.3% sequentially. Contributed +1.32% to Total GDP
G: Government less of a drag in 2Q13, growing -0.4% QoQ vs. -4.6% in 1Q13. Contributed -0.08% to Total GDP on the quarter.
NX: Total Exports growing 5.4% QoQ (vs. 9.5% for Imports). Net exports contributing -0.81% to Total GDP vs. -0.28% last quarter.
Inventories: Inventories provided a positive contribution to GDP of +0.4. Down from a positive contribution of +0.9 in 1Q13.
Inflation: The PCE Deflator printed at its second lowest level ever, coming in at 0.8%, helping to support real consumption growth
Final Sales (GDP less Inventory Change): Growth in Real final Sales accelerated to 1.3% in 2Q13 vs 0.2% in 1Q13
Final Sales to Domestic Purchasers: Reminder - this metric is a measure of GDP excluding both exports and changes in Inventories. In measuring total U.S. demand from both domestic and international sources, arguably, it offers the cleanest read on the health of the domestic private sector. Growth in Final Sales to Domestic Purchasers accelerated to 2.0% from 0.5% in 1Q13.
Benchmark Revision: This benchmark revision is interesting, but not particularly investible. Below we provide a summary review of the methodology changes from Bloomberg Economist Joseph Brusuelas along with a comparison of the Pre and Post revision GDP estimates from the BEA.
Consumption: Consumption growth decelerated 30bps sequentially in 2Q13. The deceleration, however, was fairly well advertised and not unexpected alongside the rising savings rate, lagged impacts of fiscal policy changes, and the difficult 1Q13 comp in which consumer spending benefited from the special dividend bonanza and compensation pull-forward in December 2012 ahead of impending fiscal cliff related tax law changes.
We continue to think the upside in Disposable Personal Income, and Consumer Spending by extension, will be constrained in 3Q13 as well given the ongoing reduction in the federal workforce and the implementation of furloughs for the balance of the fiscal year. That said, it’s now August and 2Q13 is rearview, 3Q13 is a third gone, the real-time labor market data remains positive, seasonality will turn positive in September, and we’re close enough to annualizing the fiscal policy drags for it to become a tractable narrative for investors.
Expectations: With consensus growth expectations for the balance of the year at a moderate 2.30 and 2.60 for 3Q13 & 4Q13, respectively, the setup isn’t as asymmetric to the upside as it was back in December. Also, congress will likely re-emerge as a negative headline catalyst in the coming weeks as budget and debt ceiling rhetoric crescendo’s yet again.
Meanwhile, flows to U.S. assets remain ongoing and Investor Sentiment, as measured by the II Bull/Bear Survey, showed bulls dropping back below 50% in the latest reading. On balance, the balance of risk in the market from an expectations perspective is less clear than its been. From here, it gets a little more interesting.
Christian B. Drake