Q2 GDP rises to 3.7% in second estimate

That’s a big jump from last month’s initial estimate of 2.3%, and an even larger leap from the 0.6% GDP growth rate in Q1. A 3.7% annualized Q2 growth rate follows the same pattern of last year, when a negative Q1 led to a robust Q2 — but that ended in stagnation-level growth the rest of the year, and another wan economic annum overall. The Commerce Department credits the bump to a better mix on exports and imports and continued consumer confidence:


Real gross domestic product — the value of the goods and services produced by the nation’s economy less the value of the goods and services used up in production, adjusted for price changes — increased at an annual rate of 3.7 percent in the second quarter of 2015, according to the “second” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 0.6 percent.

The GDP estimate released today is based on more complete source data than were available for the “advance” estimate issued last month. In the advance estimate, the increase in real GDP was 2.3 percent. With the second estimate for the second quarter, nonresidential fixed investment and private inventory investment increased. With the advance estimate, both of these components were estimated to have slightly decreased (see “Revisions” on page 2).

The increase in real GDP in the second quarter reflected positive contributions from personal consumption expenditures (PCE), exports, state and local government spending, nonresidential fixed investment, residential fixed investment, and private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased.

The acceleration in real GDP in the second quarter reflected an upturn in exports, an acceleration in PCE, a deceleration in imports, an upturn in state and local government spending, and an acceleration in nonresidential fixed investment that were partly offset by decelerations in private inventory investment, in federal government spending, and in residential fixed investment.


The difference wasn’t an inventory illusion. Real final sales of domestic product — the GDP minus inventory adjustments — grew at an annualized 3.5% rate, about the same as GDP overall. PCEs didn’t exactly accelerate, but at 3.1%, consumer spending was only a little off the pace. The growth of exports nearly doubled growth in imports (5.2% to 2.8%), which seems a little amazing given the rocky state of the global economy at the moment. Private investment had its fifth positive quarter in a row, and was significantly strong at 5.2%. Residential and intellectual properties categories led the way, but the only decline was in equipment at -0.4%.

The report cites government spending as a growth area, but that only applies at the state and local level, which went up 4.3%. Federal spending was flat overall, and declined 0.4% on non-defense spending in Q2. That will likely spike in Q3 as budgets close out and federal agencies feel pressure to spend funds before the end of the fiscal year, but at least for now it’s neither a boon or a drag on GDP.

The Wall Street Journal sees this as a positive report, but with a couple of potential dark clouds on the horizon:

The latest figures on business investment—reflecting spending on construction, equipment, and research and development—are especially welcome. The category rose at a 3.2% pace, compared with an earlier estimate of a 0.6% decline, suggesting a degree of optimism about future demand.

Stronger balance sheets may have helped. Corporate profits after tax, without inventory valuation and capital consumption adjustments, rose at a 5.1% pace from the first quarter, the biggest jump in a year. On a year-over-year basis, corporate profit growth was 7.3%.

That measure of corporate profits most closely matches what companies report in earnings statements. Profit data isn’t inflation adjusted.

But companies also added to stockpiles, an accumulation of goods that is unlikely to continue into the current quarter. Real private inventories increased at $121.1 billion pace in the second quarter, adding 0.22 percentage point to GDP. Commerce initially said inventories were a small drag on growth.


So far, though, Q3 seems to be doing pretty well. Yesterday’s durable goods report for July offered mostly sunny skies and fair weather on the economy:

New orders for manufactured durable goods in July increased $4.6 billion or 2.0 percent to $241.1 billion, the U.S. Census Bureau announced today. This increase, up two consecutive months, followed a 4.1 percent June increase. Excluding transportation, new orders increased 0.6 percent. Excluding defense, new orders increased 1.0 percent. Transportation equipment, also up two consecutive months, led the increase, $3.8 billion or 4.7 percent to $83.2 billion. …

Inventories of manufactured durable goods in July, down two of the last three months, decreased $0.1 billion or virtually unchanged to $402.1 billion. This followed a 0.4 percent June increase. Primary metals, down six consecutive months, drove the decrease, $0.2 billion or 0.5 percent to $37.1 billion.

Nondefense new orders for capital goods in July increased $0.9 billion or 1.1 percent to $82.3 billion. Shipments increased $0.1 billion or 0.1 percent to $79.3 billion. Unfilled orders increased $3.1 billion or 0.4 percent to $762.2 billion. Inventories increased $0.2 billion or 0.1 percent to $177.3 billion. Defense new orders for capital goods in July increased $2.0 billion or 22.3 percent to $11.0 billion. Shipments increased $0.2 billion or 1.5 percent to $10.6 billion. Unfilled orders increased $0.5 billion or 0.3 percent to $149.8 billion. Inventories increased $0.2 billion or 1.0 percent to $23.0 billion.


In general, orders are up, backlogs are increasing, and inventories are shrinking — all positive signs. Capital investment is increasing as well, which signals that businesses think the future looks bright enough to build up. It’s only one quarter removed from a goose egg, though, and we have seen this pattern before. We end up with an average level of stagnation-style low growth, which then continues into the rest of the year. Seasonal adjustments may be the problem, especially in Q1, but the overall arc still remains at a low-2s kind of recovery for the past six years. Until we see a few quarters strung together like this, skepticism is still the safest position.

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