U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15

Takeaway: 2Q GDP was largely in-line and the focus was mostly on the revisions. Growth is set to meaningfully decelerate in 2H15.

*Note:  The July data carries revisions & statistical updates including:  revisions to 2012-1Q15 GDP data, statistical methodology changes to reduce residual seasonality and the introduction of the GDI/GDP hybrid series and the Real Final Sales to Private Domestic Purchasers series.

  • Revision (1st chart below):  This bigger news is  probably in the revisions than in the 2Q data itself with 1Q15 revised from negative to positive (from -0.2% to +0.6%) and 1Q14 revised from -2.1% to -0.9%. 
  • Headline:  QoQ GDP = +2.3% = below consensus at +2.5% but the miss is largely irrelevant given the revision to 1Q  (i.e. people were largely modeling 2Q relative to the original -0.2% 1Q print or some mostly unknown expectation around the revision)
    • YoY – GDP decelerates to +2.3% YoY vs 2.9% prior
    • Consumption:  YoY Consumption Growth decelerating sequentially against the upwardly revised (& post-crisis peak) 1Q15 figures. 
  • C + I + G + NX: all expenditure types contributing positively in 2Q
    • Consumption:  Contributing +1.99% to headline and accelerating QoQ  to +2.9%.  Solid growth across all of Durables/Nondurables/Services
    • Investment:  Contributing 0.06% and decelerating to +0.3% QoQ  à Inventories were a negative contributor this quarter after last quarter’s outsized contribution, Resi investment was decent while NonResi investment contributed -0.1% and was down -0.6% QoQ
    • Government: Contributing 0.14% and accelerating to +0.8% QoQ
    • Trade Balance:  Contributing 0.13% with exports rising at a premium to imports QoQ following 1Q’s collapse
  • Inflation:  GDP price index and Core PCE accelerating sequentially (on QoQ basis) to +2.0% and +1.8%, respectively  – not overly remarkable given the 0% inflation reported in 1Q. 

Sub-Aggregates:  Better on balance

  • Real Final Sales (GDP less Inventory Change):  accelerating to +2.4% from -0.2% prior
  • Gross Domestic Purchases (GDP less exports, including imports):  modest deceleration to 2.1% growth vs +2.5% prior
  • Real Final Sales to Domestic Purchasers (GDP less exports less inventory change):  arguably the best read on overall domestic demand; accelerating to +2.2% vs. +1.7% prior  

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15 - GDP PRe Post

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15 - Real PCE YoY

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15 - GDP Summary Table

-Christian Drake, Senior Analyst

U.S. GIP Model Update

With the advent of the 2Q15 GDP report, we are now at +2.1% for CY15, which is down -10bps from our previous estimate as 2Q15 came in 10bps shy of our forecast of +2.4% YoY. The QoQ SAAR figure came in at +2.3% as well, or 20bps shy of our forecast of +2.5%.

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15 - UNITED STATES

Looking to our U.S. Economic Summary Table, we see that growth is slowing on a sequential and trending basis across a broad swath of key high-frequency data:

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15 - U.S. Economic Summary Table

The decelerations and/or outright YoY declines in consumption and investment growth coupled with plunging consumer and business confidence speak loudly to the lack of sequential momentum in the economy that could otherwise help economic growth surmount steepening base effects throughout the balance of the year.

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15 - GDP COMPS

The net result on the model is that real GDP growth is likely to slow sharply in 2H15 from a cycle peak growth rate of +2.9% YoY in 1Q15. Our revised forecasts are as follows:

  • 3Q15: +1.6% YoY and +1.4% QoQ SAAR
  • 4Q15: +1.5% YoY and +1.7% QoQ SAAR

***Reminder: we don’t care much about the “headline” QoQ SAAR figures. The YoY rate of change continues to be where our focus lies as that has historically been the most explanatory of asset class returns and most useful for front-running key inflection points in and across economic cycles.***

Keep in mind that we won’t get the 3Q GDP report until the end of October and 4Q GDP won’t be reported until the end of next January. That lag may give the Fed scope to pretend like domestic economic growth is hanging in there just fine (even though the preponderance of high-frequency data is unlikely to support that view in the interim).

Moving on to inflation, we continue to see little sequential momentum in either direction from the perspective of reported inflation here in 3Q.

On one hand, decaying base effects support a modest acceleration in YoY CPI in 3Q and a meaningful acceleration in 4Q. On the other hand, the dramatic loss of “non-core” inflationary pressures we’ve seen in the third quarter to-date supports a continued bottoming process in inflation intra-quarter.

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15 - CPI COMPS

U.S. GDP: IF YOU THINK 2Q WAS "BLAH", WAIT UNTIL IT TURNS "BAD" IN 2H15 - INFLATION

All told, with a sharp deceleration in growth in 2H15 as our most differentiated view from consensus with respect to the U.S. economy, we continue to reiterate our lower-for-longer view on interest rates and our bearish bias on all things reflation.

Moreover, we expect market breath to continue to deteriorate on a trending basis as falling growth expectations beget premiums for real growth stories and discounts for the myriad of companies that will see their toplines suffer from the 1-2 punch of slowing economic growth and low inflation. For more on this, we encourage you to review the following two research notes:

Feel free to email us with any questions. Best of luck out there!

-Darius Dale, Director