The big-picture economic news looks good, on the surface. But don’t be fooled. It’s not as robust as it looks.
Today’s release of the “advance” number for second-quarter GDP shows that the economy rose by a real annualized 1.9% pace in the three months through June. That’s up sharply from the 0.9% rate in Q1. Is it time to break out the champagne and declare the slowdown over? No, not even close. The correcting and cleansing process for the economy has only just begun.
Our reasoning starts with the observation that Q1’s 1.9% jump, while better than the previous number, is mediocre, at best, in the context of the last several years. More importantly, a closer look at the catalysts for Q2’s rise raises questions about the future.
A key contributor to the latest GDP rise comes from consumer spending, which rose 1.5% in Q2. That’s up from 0.9% previously. Good news, right? Yes, although one has to wonder how much of this is related to the stimulus checks that have been mailed out since May. Stimulus payments are a one-time boost and so they won’t be juicing the economy forever. When the charm wears off, consumers will be left to spend their own money. The question is: how optimistic will consumers be from here on out?
Meanwhile, take note that most of the rise in consumer spending in Q2 comes from increased purchases in nondurable goods while spending on cyclically sensitive durable goods dropped sharply. Not an encouraging sign. Indeed, the 3.0% decline in durable goods spending in the previous quarter follows the 4.3% drop in Q1. Back-to-back drops like this are rare for durable goods, and so the trend suggests more trouble on the consumer front.