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US 2Q GDP: Strong consumption, but weak net exports and inventories – Wells Fargo

Data released today showed the US grew at an annualized rate of 2.1% during the second quarter (real – annualized), above expectations. Analysts at Wells Fargo point out net exports and inventories weighed on the overall rate of real GDP growth during the second quarter. Despite the number, they consider the FOMC will likely cut rates by 25 bps on July 31.

Key Quotes: 

“Overall GDP growth in the second quarter was driven largely by real personal consumption expenditures (PCE), which shot up 4.3%.”

“The PCE data show that the American consumer is alive and well.”

“Government spending, which grew 5.0% in Q2, was another notable area of Strength (…) Overall government spending should grow more slowly in coming quarters.”

There were some notable areas of weakness. For starters the GDP data show that the nation’s housing market remains largely stuck in the doldrums as real residential construction spending edged down 1.5%, the sixth consecutive quarter in which this spending component has declined. Real exports fell 5.2%, which reflects slower growth in the rest of the world as well as trade war effects. Although real imports were essentially flat on the quarter, real net exports sliced 0.7 percentage points from the overall GDP growth rate.” 

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Today’s GDP print has very few implications for the FOMC meeting on July 31. Although the outturn was slightly stronger than expected, we still look for the FOMC to cut its target range for the fed funds rate 25 bps.”

“We expect that real GDP will continue to grow between 2% and 2.5% in coming quarters. That said, inflation continues to run below the Fed’s target of 2%, and the FOMC seems to be concerned about some of the uncertainties related to trade and other geopolitical factors that cloud the economic outlook.”

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