US GDP 2Q16
Cyclical Factors weigh on US GDP but the foundation is laid for a powerful acceleration going forward
US GDP grew at a disappointing 1.2% (q/q, annualised) in the second quarter of 2016, well below consensus forecasts of 2.6% (Reuters). The main negative contributors, as has been the case in recent quarters, were a continuing reduction in inventory levels and weak non-residential investment spending. The change in inventory levels during the second quarter, subtracted 1.2% from overall GDP, while non-residential fixed investment subtracted a further 0.3%.
Furthermore, in contrast to prior quarters, the government contribution (Federal, State, and Local) was also weaker, subtracting 0.16% from overall GDP growth. Reversing out these negative contributions, GDP growth would have been closer to 3%. In particular, personal consumption expenditure growth rebounded very strongly in the second quarter, growing by 4.2% and averaging around 3% for the first-half of the year.
As we have noted in past publications, the build-up of inventory levels in the US economy during 2014 and early 2015 and the decline in the oil price (which impacted on the domestic energy sector and associated capital spending) have been key headwinds constraining overall growth in the US economy. However, these factors are cyclical. Inventory levels cannot decline relative to consumption levels forever, nor can fixed investment spending. As long as consumption continues to grow, an eventual rebound in these cyclical components of GDP is inevitable.
In fact, inventories have contributed negatively to overall US GDP growth for five consecutive quarters, the longest such streak since the last recession in 2009. This is a positive development, which along with the recent pause in fixed investment spending, lays the foundation for a very strong rebound and acceleration in GDP growth looking out over the next several quarters. The risk to US GDP growth forecasts for 2017, amid an economy that continues to add jobs and exhibit wage growth, is firmly to the upside.
As the chart below shows, if inventories remain unchanged in H2 2016 (as opposed to the outright contraction reported in Q2 2016), and overall nominal GDP grows by 2% (0.5% real growth), our cyclical indicator for inventory levels relative to GDP will decline to the lowest levels since the last recession and likely setting the stage for a very powerful acceleration in headline GDP in 2017.
Tags: Inventory, US, US Macro