US: Growth Slows in Q2, Despite Strength in Domestic Spending 

The U.S. economy expanded by 1.5% quarter-on-quarter (q/q, annualized) in the second quarter, unchanged from the advance estimate.

Underneath the modest headline, consumer spending rose by a healthy 3.4% (up from the initial estimate of 3.2%), well above Q1’s 0.5%. Goods and services spending accelerated to 4.3% and 3.1%, respectively.

Business investment was also strong, rising 8.5% in the quarter. Growth was led by another healthy gain in equipment spending (+13.6%) and further strength in intellectual property products (+8.8%). Spending on structures (-1.8%) declined for the tenth consecutive quarter. Residential investment (+1.2%) rebounded modestly as home sales picked up during the spring buying season.

Government spending declined as the post-shutdown rebound in Q1 faded.

International trade shaved 1.1 percentage points (pp) from Q2 growth, as a surge in imports (+12.5% vs. the initial 11.5%) was only partly offset by a decent gain in exports (+4.5%). Inventory investment shaved 0.7pp off Q2 GDP.

Final sales to private domestic purchasers, a better gauge of underlying demand as it includes only household consumption and investment, rose by a very healthy 4.2% – a sharp acceleration from Q1’s gain of 1.7%.

Real Gross Domestic Income (GDI) – an alternative measure of economic output – rose 2.2% after rising 1.2% in Q1.

• Corporate profits were up 9% (unannualized) or $400 billion after accounting for inventory valuation and capital consumption adjustments, with healthy gains from both the financial and non-financial sectors.
• Personal income rose 3.9%, led by decent growth in wages & salaries (+3.6%).

Key Implications

The second estimate brought no material changes to Q2 GDP. We would look through the modest headline reading and focus on the stronger underlying details. Growth in household spending and fixed investment were both solid, with the two components together expanding at their fastest pace in 13 quarters. The pickup in gross domestic income further underscored the economy’s strength last quarter.

Higher frequency data releases through July suggest that last quarter’s momentum looks to have carried over into Q3. While rising interest rates, volatile energy prices and the new trade skirmish with Canada could act as near-term headwinds, we expect the economy to sustain growth of 2.5% through the second half of the year.