Morning Commentary: U.S. GDP – Something for Everyone

Foreign Exchange - Morning Commentary

U.S. GDP – Something for Everyone

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Today’s U.S. Q2 GDP has something for everyone. While the overall report beat expectations, there are some worrisome components within the report that will continue to negatively impact future expectations and growth. Overall, Q2 U.S. GDP came in at 2.1% which beat expectations of 1.8%; Q1 GDP remained unrevised at 3.1%. While the 2.1% number beat expectations, it is the weakest quarter since Q1 2017 when President Trump first took office.
The report shows that the consumer remains generally upbeat and optimistic while business investment and exports are taking it on the chin. Consumer spending rose by an impressive 4.3% with an upward revision to Q1 meaning that consumer spending rose by nearly 5% in Q2. Durable goods purchases rose to the fourth highest level since the end of the Great Recession. The savings rate was also revised higher and now stands at 8.1% indicating that the consumer is in a very good place with both improved spending and savings. Consumer spending makes up about 70% of GDP.
The negatives on the report were related to non-residential investment which fell by 0.6%, the first drop since 2015. Residential investment also fell for a sixth straight period. Reduced global trade volumes and tariffs have taken their toll with exports falling sharply to a 12-year low. Prices rose sharply from Q1 at 2.4%, but core prices rose less than expected at 1.8%. Today’s figures showed that GDP rose 2.9% in 2018, and from Q4 2017 to Q4 2018, GDP rose by 2.5%.
Bottom line: There are reasons to be optimistic about the future path of the economy, and there are reasons to be concerned. Early calls for a recession appear to be premature as updated forecasts for the second half of the year reside near 2.0%. Market reaction at this time is pretty muted. U.S. interest rates are fractionally lower, and the U.S. dollar is mixed to higher. U.S. equities, as measured by the Dow, are opening near unchanged.
  • The Bank of Russia cut interest rates as expected by 25 bps to 7.25%. This is the second consecutive month the central bank has cut interest rates. Slowing inflation and lethargic economic growth are providing cover for the central bank to cut interest rates. CPI was 4.7% in June making it the third straight month of declining inflation.
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