Q2 3% + GDP Growth Confirmed?

Financial FAQs

The best news of last week was the ‘Yuge’ jump in consumer spending and manufacturing, which should signal a Yuge jump in Q2 GDP; perhaps to as much as 4 percent.

Graph: Econoday

 

That’s because consumers spending is up 4 percent YoY, and since it takes up 70 percent of GDP activity, it usually means at least 3 percent plus GDP for the quarter just ended, plus net exports. And manufacturing is now picking up, which is the main driver of exports.
April’s 1.1 percent consumer spending gain was the best monthly gain of the cycle since August 2009. And May's gain of 0.4 percent was the second best since November last year. So April and May together track at 4 percent annualized growth which has lifted outside expectations for 3 percent growth in second-quarter GDP, as we said.

Manufacturing activity also shot up, according to the ISM Manufacturing report. The headline index easily beat expectations at 53.2 for the best reading since February last year. The report's new orders index is especially strong, up 1.3 points in June to 57.0 with export orders now keeping up, gaining 1.0 point to 53.5 for the 4th straight plus-50 showing, says Econoday.

As if to confirm the role of exports in helping to boost GDP, the Q1 GDP third growth estimate was revised upward to 1.1 percent last week, mainly because of higher exports. Net exports added more than 1 tenth to GDP as exports rose slightly in the quarter and imports fell. An upward revision to software helped shave the negative contribution from nonresidential investment by 2 tenths to 6 tenths.

Another telling indicator of future growth is the ISM’s Chicago Purchasing Managers Index, which shows both manufacturing and non-manufacturing business activity.

Volatility is the name of the game when it comes to the Chicago PMI business activity index, which surged in June to a 56.8 level that is far beyond expectations and follows a sub-50 contractionary reading of 49.3 in the May report. And there was no indication in the May report of the strength to come as both new orders and backlog orders were in outright contraction.

But that was for May! For June, new orders are suddenly at their best level since October 2014 while backlog orders are rising at their fastest pace since May 2011.

This has to mean that sudden spring surge in growth, which in past years has surpassed 4 percent in the second quarter ending in June.

Harlan Green © 2016

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