Don't Sweat The Weaker 2Q GDP Just Yet

This report is really about an investment slowdown. , which accounts for 70% of US growth, was strong and rebounded from a weak 1Q:

Personal Consumption Expenditures

Personal Consumption Expenditures

All three categories of spending—, non-durable goods and —increased at their strongest Q/Q pace in 4 quarters. This is confirmed be the last few real figures:

Real Retail And Food Services Sales

Real Retail And Food Services Sales

In contrast, business investment declined at the sharpest rate in 4 quarters:

Percent Change From Preceding Quarter in Investment

Percent Change From Preceding Quarter in Investment

Why is this happening? The market slowdown is a primary contributor:

Industrial Production Mining

Industrial Production Mining

Mining production (which includes oil extraction) declined 21% in the last year, which is bound to have a negative impact on equipment investment (the red bar 2 graphs up) .

Non-residential structural investment (blue line above) has declined in 6 of the last 8 quarters. I haven’t found a good explanation for this, although this graph of capacity utilization may provide part of the answer:

Capacity Utilization Total Industry

Capacity Utilization Total Industry

Overall utilization has been declining since the mid-1990s; it has peaked at lower levels for each of the last 2 expansion. If an economy is using fewer real estate resources, it needs less real estate. This also ties into the secular stagnation theory, part of which states that a knowledge/technology-based economy needs fewer real estate resources, leading to a lower amount of physical investment.

Interestingly enough, residential investment (the purple bar above), which had been a strong contributor to growth, declined M/M as well. This is the first drop for this category since the 1Q14. It does make more sense which you consider that and have moved sideways for the last year or so:

Housing Starts and Building Permits 2011-2016

Housing Starts and Building Permits 2011-2016

It’s doubtful we’ll see a strong pick-up in non-residential structural investment due to the low rate of and shift towards an intellectual capital economy. However, since the start of the year oil has rebounded in price, implying we’ve at least seen a bottom in the pace of equipment investment. And the housing market continues to grow: existing home sales just hit a 9-year high and the new home market is very tight:

US: Monthly Supply Of Houses vs New One Family Units Sold 2006-2016

US: Monthly Supply Of Houses vs New One Family Units Sold 2006-2016


The above graph plots new home sales (red line, left scale) and the months of supply of new homes (blue line, right scale). It shows that while new home sales have been increasing since 2011, the months of supply have been holding steady. While this is positive for prices (and new home builder profits) it may eventually lead to a shortage. Ultimately, this means we have a higher probability of additional residential investment, reversing this quarter’s contraction.

Ultimately, it’s looking more and more like the U.S. economy has shifted into a lower but ultimately steady pace of growth.

Original post

The article Don't Sweat The Weaker 2Q GDP Just Yet was originally published at Investing.com - market overview.