Government consumption and inventories were a bigger drag though. All adjusted for inflation.
By Wolf Richter for WOLF STREET.
Back on July 30, the “advance estimate” of GDP for the second quarter showed 3.0% growth, held down by anemic consumer spending growth and plunging inventories. The “second estimate,” released on August 28, revised GDP growth for Q2 higher to 3.3%.
Today, the “third estimate” of Q2 GDP revised Q2 GDP growth to 3.8%, the fastest growth since Q3 2023, driven largely by a big up-revision of consumer spending. This 3.8% rate of growth is in the hot zone for the US, whose average GDP growth over the past 10 years is just over 2%. All growth figures are adjusted for inflation.
The “first estimate” of GDP growth is the one that gets all the attention in the media. The revisions are normally not the focus of any attention. For that reason, I will compare today’s “third estimate” to the “first estimate,” in part because the up-revisions were so big and cumulative.
Consumer spending growth was revised up to +2.5% in Q2. The first estimate had pegged consumer spending growth at a worrisomely anemic 1.4%, the second estimate at 1.6%. Today’s massive up-revision to +2.5%, nearly doubling the growth rate of the first estimate, was the biggest contributor to the up-revision of overall GDP growth (all adjusted for inflation).
This 2.5% is healthy growth in consumer spending. The red line shows the annualized consumer spending in 2017 dollars (right scale). The blue columns show the growth rate in percent (left scale).
Private fixed investment was revised to a growth rate of 4.4%, from the dreadfully anemic 0.4% in the first estimate. Today’s up-revision substantially contributed to the up-revision of overall GDP growth:
- Investment in equipment was revised up to +8.5%
- Investment in intellectual property was revised up to +15.0%.
- Investment in structures had plunged by 10.3% in the first estimate. This plunge was reduced to -7.5% today.
But residential fixed investment (such as construction of single-family and multifamily homes) was pegged in the first estimate at a drop of -4.6%; this drop increased to -5.1% in today’s third estimate, and lowered the up-revision of private fixed investment.
Revisions that pushed the other way v. first estimate:
Net exports (exports minus imports) were revised lower, they worsened:
- Imports plunged a little less (-29.3%) than the first estimate (-30.3%); imports subtract from GDP.
- Exports fell by 1.8%, same rate as the first estimate. Exports add to GDP.
Government consumption shrank by 0.1% (federal, state, and local governments combined), compared to growth of 0.4% in the first estimate.
The plunge in private inventories worsened, and deducted 3.44 percentage points from GDP growth, versus 3.17 percentage points in the first estimate. Inventories had soared in Q1 on tariff-frontrunning, and in Q2 they undid some of that increase.
What slowdown?
The strong Q2 growth came after the explosion of imports on tariff-frontrunning had knocked Q1 GDP growth into the negative (-0.6%). Consumer spending growth in Q1 was also weak. So there were a lot of concerns about growth. And the first estimate of Q2 consumer spending growth (+1.4%) did nothing to alleviate those concerns.
But the revised Q2 growth figures, especially the up-revisions of consumer spending back into the healthy range, should relieve those anxieties.
And Q3 consumer spending so far looks pretty good, as indicated by strong retail sales in July and August. So maybe the wait for the downward spiral of the economy – despite reduced government spending – may have to be extended a little further?
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So everything is “fixed” then? LOL!
With the eCONomy doing so well, I am sure the government will have more than enough revenues to cover their expenses.
The tragedy is that despite pretty strong economic growth over the past few years, the deficits of the federal government have been huge. What’s going to happen to those deficits when there is a recession? They’re going to totally blow out.
Along with yields
Doesn’t this mean the FED will do anything it can to avoid recession? With the FED bailing out every negative consequence of its own policy choices, can asset prices ever come down?
Feels like the only thing that will stop this train is a prolonged recession with no FED interference/bailouts.
If there is a recession, the Fed will cut rates some, and the recession will go away — likely on its own, even without rate cuts.
Was it Yellen who said there won’t be anymore recessions? Or am I mistaken?
I was looking at old data of government spending in previous recessions and what we the government has done during end of trump first term and Biden 4 years is off the charts literally. We pumped money equivalent to 4 previous recessions and 2020 recession lasted for only few months. We added 4 trillion debt just in 2020 year which was last year of trump term and then Biden double dipped on it. No wonder we are not going to see any recession.
MW: “Economists predict significant Q4 slowdown due to Trump tariffs on Pumpkin Spice”
LOL, they already predicted a “significant slowdown due to Trump tariffs” for Q2 (see above for how that turned out), and for Q3 (looking good so far), and having failed in their predictions due to their inbred anti-tariff BS, they now shift the slowdown out again. These same morons have been predicting a recession ever since the Fed started hiking interest rates in 2022. They have been wrong for three years straight. There people are braindead. Maybe someday they’ll get their recession.
But why does anyone still pay attention to their prediction-BS? I tell you why: The clickbait media, such as MarketWatch, make money pushing out stupid headlines because people love to spread stupid headlines across the internet. I’m afraid brains have turned to mush, starting with the brains of economists and reporters in the media. I hope they will be replaced by AI — and probably have already been replaced by AI. At least, AI is cheaper and no worse.
The whole adjustments/revisions saga brings up the question of how the GDP is calculated. Not on the basis of exports/imports, investments…, but how the data is collected and evaluated to arrive at the number. The inflation deflator is another yet can of worms.
You can study this for years. GDP is a huge, gigantic, complex data base whose data are collected from ALL sources, including administrative sources, such as the IRS, import and export data from ports, etc. A lot of this data takes a while to accumulate, such as IRS data, and when it become available, the prior estimates of GDP are revised.
Consumer spending in dollars is chained to inflation (what about consumer sales?) and fixed investment , is that AI? and if GDP and CPI rise together at some point CPI will rise faster, just saying, and that will scare the hell out of a lot of people. but I dont get it, we are being taxed to death, income, sales and tariffs and people have money to spend?
ALL data cited here are expressed in 2017 dollars to adjust for inflation, no exceptions.
No no no, too much good news and not enough ammo for the FED to continue to cut again without appearing they are under pressure for political reason only. MSM need to be quick to come up with some headlines to show the economy is going off the cliff and we need more cuts now…we need urgent manufacture consent…lol
The Fed needs to raise rates. GDP is much better than expected, inflation is rising. If 2 million people (illegals arrested and voluntary leavings) have left the labor force, as the administration says, then jobs numbers should decrease, but the unemployment rate should stay about the same. And so it has. BTW, this is bad news for businesses and landlords, and good news for remaining workers whose wages should increase. The core PCE price index tomorrow will be interesting.
Two million gone, eight million more to go!
Extract inflationary liquidity by resuming the $50B per month Treasury QT.