July 25, 2024
GDP growth bounced back in the second quarter, growing at a 2.8 percent annual rate in the second quarter following a quarter where it grew just 1.4 percent. An uptick in equipment investment and durable goods consumption were the two biggest changes in categories of final demand. Equipment investment grew at an 11.6 percent rate after growing at just a 1.6 percent rate in the first quarter. Durable goods consumption grew at a 4.7 percent rate after falling at a 4.5 percent rate in the first quarter. Investment and consumption accounted for growth in the quarter of 0.69 percentage points and 1.57 percentage points, respectively.
Stronger Durable Goods Consumption Raises Consumption Growth
The turnaround in durable goods consumption was the biggest factor raising the rate of consumption growth from 1.5 percent in the first quarter to 2.3 percent this quarter, although nondurable goods consumption also turned around from a decline of 1.1 percent to an increase of 1.4 percent. Consumption of services slowed, growing at a 2.2 percent rate after rising at a 3.3 percent rate in the first quarter.
A turnaround in car sales was a big factor in durable consumption, adding 0.12 percentage points to growth after declining by 0.4 percentage points in the prior quarter. The category of recreational goods and vehicles was also a big factor, adding 0.11 percentage points to growth. Real spending in this category has risen sharply since the pandemic. It is now 68.5 percent higher than before the pandemic.
The reversal in nondurable spending is largely attributable to a rise in real spending on gas, which fell in the first quarter. The slowing in service spending is largely explained by a slower pace of growth in real spending on health care services, from 7.2 percent in the first quarter to 4.0 percent in this quarter.
Equipment Investment Turns in Strongest Quarter in More Than Two Years
The 11.6 percent increase in equipment investment was the fastest since a 16.8 percent rise in the first quarter of 2022 when the economy was still recovering from the recession. The biggest factor was transportation equipment, which accounted for 0.42 percentage points of the growth.
Reported Saving Rate is 3.5 Percent, Almost Certain to be Revised Upward
The reported saving rate is at an unusually low of 3.5 percent. The low saving rate has often been cited as evidence that people are being forced to dip into their savings. However, this is more likely attributable to errors in our data.
The statistical discrepancy in GDP, the gap between GDP measured on the output side and GDP measured on the income side, was an unusually large 2.3 percent of GDP in the first quarter. (We don’t have the second quarter data yet.) These numbers are by definition equal; the gap indicates that there are measurement errors.
While we can’t know which direction subsequent revisions will take, if the revisions are on the output side, that almost certainly means lower consumption, which would mean higher savings. If the revisions are mostly on the income side, this would mean higher income, which also means higher savings. This means that the true saving rate is almost certainly around 2.0 percentage points higher than the currently reported saving rate.
Import Growth Outpaces Export Growth in Second Quarter
Imports rose at a 6.9 percent annual rate, while exports grew at just a 2.0 percent rate. As a result, net exports subtracted 0.72 percentage points from growth in the quarter. This is a modest deterioration from the first quarter when trade subtracted 0.65 percentage points from growth. That follows seven consecutive quarters where trade had a positive effect on growth.
Residential Investment Edges Lower
Residential investment fell at a 1.4 percent annual rate after rising at a 16.1 percent rate in the first quarter. The reversal can be explained by a small drop in the construction of single-family homes, after a large rise in the first quarter. Also, there was a modest drop in commissions and fees this quarter after a big jump in the first quarter.
Inventory Accumulation Adds 0.82 Percentage Points to GDP
Inventories accumulated at a $71.3 billion annual rate in the second quarter after rising at just a $28.6 billion annual rate in the first quarter. As noted earlier, the slow pace of accumulation subtracted 0.42 percentage points from growth in the first quarter. The current quarter’s rate is in the normal range, so we should not expect a big rise or fall in future quarters, although inventories are unpredictable and have a large impact on the measure of quarterly GDP.
Inflation Continues to Slow
Personal Consumption Expenditure (PCE) deflator rose at a 2.6 percent rate in the second quarter, down from a 3.4 percent rate in the first quarter. The year-over-year PCE deflator was up 2.6 percent, and the core 2.7 percent. With rental inflation virtually certain to slow further over the rest of the year, inflation is getting close to the Fed’s 2.0 percent target.
A Very Solid GDP Report
There is much to like in this report. The economy is growing at a solid pace that is roughly in line with most estimates of the economy’s potential growth. Inflation is continuing to slow, and given the virtual certainty of rental inflation slowing, it should be very close to the Fed’s 2.0 percent target by the end of the year.
The weak GDP growth in the first quarter translated into weak productivity growth after three very strong quarters at the end of 2023. With hours growth likely to come in at close to 1.5 percent for the second quarter, we should see productivity growth slightly over 1.0 percent. That does not help the case for a pick-up in the pace of productivity growth, but it should be fast enough to leave it an open question. In any case, the economy is still looking very good.
