Consumers Overcome Contracting Investment And Inventory For 1.2% GDP Growth In Q2 2016

In their first preliminary estimate of the US GDP for the second quarter of 2016, the Bureau of Economic Analysis (BEA) reported that the growth rate was +1.21%, up 0.38% from a downwardly revised prior quarter.


The most notable item in the report was the continued contraction of US commercial fixed investments, which subtracted -0.52% from the quarter's headline growth rate (down -0.37% from a downwardly revised first quarter). This was the third consecutive quarterly decline for fixed investments. Inventories also contracted (subtracting -1.16% from the headline), in this case for the fifth consecutive quarter. 

The positives from the report were almost entirely consumer spending. Consumer spending on goods rebounded nicely from a couple of soft quarters to provide a decent 1.45% of the headline (up 1.20% from an upwardly revised first quarter), while spending on services also strengthened to a healthy 1.38% contribution (up 0.52% from a downwardly revised first quarter). Combined spending on goods and services provided a reported 2.83% of the headline annualized growth rate. 

The BEA's treatment of inventories can introduce noise and seriously distort the headline number over short terms -- which the BEA admits by also publishing a secondary headline that excludes the impact of inventories. The BEA's "bottom line" (their "Real Final Sales of Domestic Product") was a +2.37% growth rate, up 1.13% from 1Q-2016. 

Real annualized household disposable income was reported to have grown by $181 during the quarter, to an annualized $38,894 (in 2009 dollars). The household savings rate dropped to 5.5% (from a revised 6.1% in the prior quarter). 

For this revision the BEA assumed an effective annualized deflator of 2.22%. During the same quarter (April 2016 through June 2016) the inflation recorded by the Bureau of Labor Statistics (BLS) in their CPI-U index was 3.42%. Under estimating inflation results in correspondingly optimistic growth rates, and if the BEA's "nominal" data was deflated using CPI-U inflation information the headline growth number would have been significantly lower, at an essentially flat +0.03%. 

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