- Real Gross Domestic Product for 2016Q2 increased at a modest 1.2 percent annual rate.
- Initial Claims for Unemployment Insurance increased by 14,000 to 266,000 for the week ending July 23.
- The Federal Reserve, the Bank of England, the European Central Bank and the Bank of Japan all left their key lending rates unchanged this month.
The first estimate of second quarter 2016 real GDP growth was much weaker than expected, registering a modest 1.2 percent annual growth rate. First quarter real GDP growth was revised back down to a 0.8 percent growth rate. The Q2 GDP numbers are a mixed bag. Inventories were a key drag, declining through the quarter and subtracting 1.2 percentage points from the headline growth rate. In the long run, the large inventory drawdown is a good thing, setting the stage for more production later. Good news also came from consumer spending, which represents two-thirds of GDP. Real consumer spending grew at a 4.2 percent annual rate, the strongest spending expansion since the last quarter of 2014. Business investment was weak, declining at a 2.2 percent annual rate, held down by low oil prices. Residential investment was also weak, declining at a 6.1 percent annual rate. The weak residential investment numbers are surprising given that both total housing starts and new home sales increased in the second quarter. International trade was a slight positive for Q2 GDP growth. Government spending was a small negative. In the third quarter, we expect the drawdown of petroleum inventories to continue to be a weight on GDP. Mostly likely, consumer spending growth will ease after the very strong second quarter. We expect business fixed investment and residential investment to improve. Trade may be a small drag. Government spending should be a positive. All in, the third quarter now looks to show moderate overall GDP growth, in the range of 2.0 to 2.5 percent.
Labor data looks good. Initial claims for unemployment insurance increased by 14,000 to 266,000 for the week ending July 23. Continuing claims gained 7,000 to hit 2,139,000 for the week ending July 16. We expect payroll employment to increase by about 185,000 jobs in July.
It is worth noting that the Bank of Japan’s Monetary Policy Committee voted today to leave their benchmark lending rate unchanged. The BOJ did increase their pace of asset purchases, including exchange-traded stock funds, which is expected to keep some downward pressure on the value of the yen. Likewise, the Bank of England, the European Central Bank and the Federal Reserve all left their benchmark interest rate unchanged this month. It is purely speculative on our part to ask the question… is monetary policy coordination back in vogue? Central bankers will have the opportunity to compare notes at the Fed’s annual retreat in Jackson Hole, Wyoming over August 25/26.
Market Reaction: Equity markets opened with losses. The 10-year Treasury bond yield dipped to 1.48 percent. NYMEX crude oil is up to $41.36/barrel. Natural gas futures are up to $2.89/mmbtu.
For a PDF version of this Economic Alert click here: GDP 07-29-16.