Friday night saw the release of the much anticipated second quarter US GDP print with the Bureau of Economic Analysis (BEA) reporting 0.6% growth, or 2.6% annualised. While this was much better than the first quarter, and only slightly below expectations, the so-called acceleration is seasonal and does not represent a new firing of cylinders to get the growth engine going as the Trump administration’s domestic political agenda remains stalled.
Indeed, as Bill McBride at Calculated Risk shows, the internal components of US growth are not running at full strength but have the potential to do so if Congress can get things moving.
The first graph below shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter trailing average). This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.
Residential investment (RI) decreased at a 6.8% annual rate in Q1. Equipment investment increased at a 8.2% annual rate, and investment in non-residential structures increased at a 4.9% annual rate.
Residential Investment as a percent of GDP decreased in Q2, but has generally been increasing. RI as a percent of GDP is only just above the bottom of the previous recessions – and I expect RI to continue to increase for the next few years.
The third graph shows non-residential investment in structures, equipment and “intellectual property products”. Investment in equipment – as a percent of GDP – picked up. Investment in nonresidential structures – as a percent of GDP – had been moving down due to less investment in energy and power, and is now picking up again.
Maybe some more investment in wall building? Markets were sanguine about the print, with the S&P500 off a few points to end the week only slightly higher. Moreover, the once mighty USD evaporated against the majors as inflationary threats domestically in the US also withered away.
