Inventory Rebound Propels Q2 GDP, Job Growth Continues
- Real Gross Domestic Product growth for 2014Q2 was stronger than expected at 4.0 percent.
- Inventories rebounded after a weak first quarter, adding 1.7 percent to real GDP growth, not sustainable.
- Real Consumer Spending increased at a 2.5 percent annual rate, as auto sales accelerated.
- The ADP Employment Report for July showed a solid gain of 218,000 private-sector jobs for the month.
The first estimate of 2014Q2 real GDP growth came in stronger than expected, at a 4.0 percent annual rate. Overall, it was a solid, if unsustainable, report. The solid component was real consumer spending, up at a 2.5 percent annual rate, well above the weather-beaten 1.2 percent growth rate for the first quarter of this year. Auto sales were an important factor. Auto sales hit a 17.0 million unit rate for June. The Bureau of Economic Analysis estimates that real consumer spending on durable goods (including cars) for Q2 increased at a 14.0 percent annual rate. Spending on nondurables was also good, increasing to a 2.5 percent growth rate. The services component of consumer spending was a little weak, gaining just 0.7 percent. We could see some revision there later on. The unsustainable component of the GDP report was the unexpected ramp-up in inventories. Real inventory accumulation for the quarter was $93.4 billion ($2009), which added almost $60 billion (real) to the increase in Q2 GDP, boosting headline GDP growth by 1.7 percent. Ninety-three billion for the quarter is not sustainable and leads us to expect that inventories will be a small-to-moderate drag on Q3 GDP. Fixed (non-inventory) business investment accelerated in Q2, adding 0.9 percent to headline GDP growth. Exports were assumed to be a moderate drag for the quarter. Federal spending was a slight drag, inhibited by the federal budget sequester. State and local government spending more than compensated for the slight drag from federal spending, adding 0.4 percent to headline GDP growth.
Adding to the good economic news, the ADP Employment Report for July showed an increase of 218,000 private-sector jobs for the month, about as expected. This bodes well for Friday’s official BLS employment report. Plus 220,000 is a reasonable expectation for the official numbers on Friday. That would extend the winning streak of consecutive +200k months to six. With good news from GDP and labor markets, the Federal Open Market Committee can be expected to announce another $10 billion reduction in their asset purchase program later today.
Market Reaction: Equity markets opened with gains, but quickly normalized. The 10-year Treasury bond yield is up to 2.52 percent. NYMEX crude oil is up to $101.39/barrel. Natural gas futures are down to $3.76/mmbtu.
For a PDF version of this Comerica Economic Alert click here: GDP 07-30-14.