Second quarter GDP was released this morning and logged an impressive 4.1% annualized quarter-over-quarter growth rate. The result was the largest quarterly growth since a 4.9% print in September 2014 and was driven by a surge in consumer consumption that logged an impressive 4.0% rate which was the largest since a 4.7% quarter in December 2014. That consumption represents a solid rebound off the first quarter’s downwardly revised 0.5% rate. Consumer consumption alone provided 2.69 points to the overall GDP number. In essence, the story of the quarter’s results is the strong rebound in consumer spending after a weak first quarter and gains in net exports (added 1.06 points to GDP) as companies moved product ahead of proposed trade tariffs. Final Sales to Private Domestic Purchasers (which weeds out the often volatile trade, inventory and government categories) was a solid 4.3% which again points to the consumer as the chief source of the quarter’s gains. The question is can the consumer continue at 4% consumption levels when wage growth remains below 3.0%? We think not. Thus, while certainly impressive the second quarter is likely a high water mark with the second half of 2018 expected to revert back to high 2% levels, and 2019 closer to the low-to-mid 2% levels. Finally, inflation indicators fared well in this report too. The Core PCE QoQ rose 2.0% which was below the2.2% first quarter level and consensus estimate. That should calm any fears at the Fed about inflation trending dangerously above 2.0%. Treasury prices are trading higher off the GDP release as the docile inflation readings and expected reversion to lower growth figures in the second half has calmed the markets. The 10-year is currently up 5/32nds in price to yield 2.96%.
|Economic News||Consumer Consumption Carries 2nd Qtr. GDP||Market Rates|
After going so far as to call the E.U. a global foe for its trade practices, the president appears to be shelving a major escalation of his tariff fight after meeting with European Commission President Jean-Claude Juncker last Wednesday.
From the quickly assembled Rose Garden announcement it appears the president is backing away from slapping a 25% duty on roughly $200 billion of imported autos. Those tariffs would have quadrupled the value of the goods covered by Trump's levies, and by one estimation cost more than 600,000 jobs.
But Trump’s commitment to the trade deal remains provisional. Indeed, Commerce Secretary Wilbur Ross, in a Wednesday night interview affirmed that “the investigation on autos will continue. It’s just we won’t impose any auto tariffs, as long as the negotiations are progressing properly.” Other details of what was actually agreed to with the European Commission president are similarly vague. The president made no specific commitment to lift the steel and aluminum tariffs he imposed back in June, nor did Juncker pledge to withdraw the retaliatory measures from the E.U. targeting American motorcycles, blue jeans and bourbon, among other products. Rather, both sides agreed to keep talking, though with no timetable.
Trump also touted an agreement by the Europeans to buy more American soybeans and liquefied natural gas. But Juncker in a speech later Wednesday indicated the gas purchases would only go forward “if the conditions were right and price is competitive. Commodities analysts were quick to note liquefied gas shipped from the U.S. could not compete on price with what the continent pipes in from Russia.
It’s not clear the two sides made any progress either on one of Trump’s leading concerns: European tariffs on U.S. autos. In their joint statement, Trump and Juncker said they would work to zero out duties on “non-auto industrial goods.” Extending that to cars will prove difficult, since the U.S. currently applies a 25% tariff to light truck imports, while the Europeans add 10% to imported autos and light trucks.
And more than a month since the last official talks on the China-U.S. trade war, there are no talks at the moment to restart stalled negotiations between the two nations. While the two countries seemed close to a deal in May, the collapse of that left Chinese officials worried that they might get played again.
So, the bottom line is that while the initial reaction to the E.U. “deal” was a risk-on move, the longer-run looks to be that trade and threats of tariffs will be a continuing overhang for markets and investors. That’s likely to keep a bid in Treasuries as issues flair, which seems more likely than not.
Consumer Consumption Carries 2nd Qtr. GDP
Consumer spending in the second quarter carried the GDP to an impressive 4.1% result, the largest since a 4.7% print in December 2014. Consumer spending was also impressive in that it was across all categories: Goods (+5.9%), Durable Goods (9.3%), Non-durable Goods (+4.2%), and Services (3.1%). The question is can the consumer continue at close to that level of consumption given a more pedestrian increase in earnings that was most recently 2.7% YoY? The answer is probably not, so we’ll need either a boost in earnings for the consumer or it’s likely consumption will dip from the second quarter to something closer to the annual income gains.