Consumer Spending Propping up GDP: How Long Can This Go On?

-edited

The second estimate of GDP, released this morning was an as expected 2.0% reading. Consumers carried the load.

Real gross domestic product (GDP) increased at an annual rate of 2.0 percent in the second quarter of 2019 according to the "Second" Estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.1 percent.

GDP Shift

Economists pegged the second estimate correctly but missed the reason: consumer spending carried the day.

Rick Davis at the Consumer Metrics Institute offers pertinent comments.

Although the headline number was essentially unchanged, the report did shift material portions of the aggregate growth into the consumer sector from commercial and governmental activities. Specifically, in the consumer sector spending on goods was revised upward by +0.11 percentage points, while spending on services was revised upward by +0.15 percentage points. Offsetting those improvements, the growth rates for spending on fixed commercial investments, inventories, government and exports dropped a combined -0.27 percentage points.

Notable Items

  • Consumer spending for goods was reported to be growing at a 1.78% rate, up 0.11pp from the previous estimate and up 1.46pp from the prior quarter.
  • The contribution to the headline from consumer spending on services was reported to be 1.32%, up 0.15pp from the previous report and up 0.86pp from the prior quarter. The combined consumer contribution to the headline number was 3.10%, up 0.26pp from the previous report.
  • The headline contribution for commercial/private fixed investments was revised downward to -0.20%, down -0.06pp from the previous report and down -0.76pp from the prior quarter.
  • Inventories subtracted -0.91% from the headline number, down -0.05pp from the previous report and down -1.44pp from the prior quarter. It is important to remember that the BEA's inventory numbers are exceptionally noisy (and susceptible to significant distortions/anomalies caused by commodity pricing or currency swings) while ultimately representing a zero reverting (and long term essentially zero sum) series.
  • The contribution to the headline from governmental spending was revised to 0.77%, down -0.08pp from the previous report but still up 0.27pp from the prior quarter.
  • The contribution from exports was revised to -0.71%, down -0.08pp from the previous report and down -1.20pp from the prior quarter.
  • Imports were left unchanged -- subtracting -0.01% annualized 'growth' from the headline number and down -0.24pp from the prior quarter. Foreign trade contributed a net -0.72pp to the headline number.
  • The annualized growth in the 'real final sales of domestic product' was revised to 2.95%, up 0.04pp from the previous report and up 0.39pp from the prior quarter. This is the BEA's 'bottom line' measurement of the economy (and it excludes the inventory data).

Quarterly Contributions to GDP

How Long Can This Go On?

Of the reported 2.0% estimate, consumers contributed 3.1 percentage points. and government contributed .77 percentage points for a total of 3.87 percentages out of 2.1%.

The open question, that no one can answer now is "How long can debt-overloaded consumers prop up the economy?"

The rest of the economy is struggling.

Mike "Mish" Shedlock

Comments (23)
No. 1-6
Mish
Mish

Editor

I am in the Grand Canyon with poor interment and phone services. But having a great time

Tony Bennett
Tony Bennett

I'm confident that when the herd turns it will be in unison.

In the coming recession look for CEO comments along the lines of "things were going along OK ... then BAM! ... like a light switch ... "

Tony Bennett
Tony Bennett

The open question, that no one can answer now is "How long can debt-overloaded consumers prop up the economy?"

...

How many - looking back 10 years and slap on the wrist punishment - are thinking "hhmm, no way I can pay current $10K debt. Lets see if can walk away from $20K instead"?

numike
numike

Holidays are around the corner spend! spend! spend! debt! debt! debt!

Realist
Realist

There is no reason to think that the economy will fall into recession anytime soon. Though I expect growth to slow over the next several years, I do not expect a recession. And though it’s possible that Trump will escalate his trade war and cause a recession, I still expect cooler heads to prevail. Trump wants to win another election and needs to reach agreements with China, Japan, Europe etc to prevent catastrophe. He will cave, as he always does, eventually. But he will claim great deals and great victories: greater than anything ever achieved by any President before him. He will solve the problem he created and end up back at the status quo. Mission accomplished.

Casual_Observer
Casual_Observer

So now we see the tax cut has been effectively zeroed out by the trade losses.