U.S. GDP Growth Disappoints as Inventories Are Reduced

Economic growth of 1.2% (SAAR, 1.2% y/y) during the second quarter followed a 0.8% Q1 gain, revised from 1.1%. GDP's increase disappointed expectations for a 2.6% rise in the Action Economics Forecast Survey. Inventory decumulation subtracted 1.2 percentage points from GDP growth. It was the largest of five consecutive quarterly subtractions. Growth during 2015 was revised to 2.6% from 2.4% estimated earlier. The GDP price index increased 2.2% (1.2% y/y), the quickest increase in a year. A 1.9% rise had been expected.

Accompanying the slowdown in overall output growth, domestic final demand improved. A 2.1% rise (2.0% y/y) in domestic final sales was the quickest increase in three quarters. Consumer spending growth led the improvement with a 4.2% rise (2.7% y/y), the quickest gain since Q4'14. It was led by an 8.4% rise (4.4% y/y) in durable goods purchases. Recreational goods & vehicle buying jumped 14.3% (9.3% y/y), the quickest rise since Q1'12. Spending on home furnishings & appliances rose 8.3% (6.8% y/y) and motor vehicles buying gained 4.5% (-0.8% y/y). In the nondurable goods area spending rose 6.0% (3.1% y/y), powered by an 8.6% gain in (2.7% y/y) food & beverage spending. Apparel buying rose 4.1% (1.5% y/y), but gasoline & fuel oil oil purchases fell 1.2% (+2.4% y/y). Spending on services strengthened 3.0% (2.3% y/y), the largest increase since Q4'14. It reflected a strengthened 4.2% rise (1.2% y/y) in housing & utilities and a 3.8% increase (4.2% y/y) in medical care. Recreation spending declined, however, at a 4.5% rate (+1.3% y/y).

Outside of personal spending, final demand declined. Business fixed investment fell at a 2.2% rate (-1.3% y/y), the third consecutive quarterly shortfall. Structures spending fell 7.9% (-7.0% y/y) and equipment purchases were off 3.5% (-1.9% y/y). Computer purchases declined 5.9% (+3.8% y/y) but industrial equipment buying gained 12.0% (3.1% y/y). Purchases of intellectual property products rose 3.5% (3.5% y/y).

Residential investment declined at a 6.1% annual rate (+6.2% y/y), the first decline since Q1'14.

Spending by governments eased 0.9% (+0.9% y/y) as state & local government purchases fell 1.3% (+1.0% y/y). Federal government spending eased 0.2% (+0.7% y/y), but defense spending declined 3.0% (-0.8% y/y).

Foreign trade added 0.2 percentage points to overall economic growth. The addition was due to a 1.4% rise in exports (-1.2% y/y) following three straight quarters of decline. Goods exports rose 2.7% (-1.3% y/y while services exports eased 0.9% -1.1% y/y). Imports slipped 0.4% (+0.2% y/y), off for the second straight quarter. Goods imports fell 0.9% (-0.4% y/y), but services imports gained 1.5% (2.9% y/y).

The GDP price index increased 2.2% (1.2% y/y) as the residential investment price index jumped 5.2% (3.1% y/y). Higher energy prices raised the PCE price index 1.9% (0.9% y/y). Excluding food & energy, the PCE price index increased 1.7% (1.6% y/y). The business fixed investment price index gained 1.1% (0.5% y/y). 

The GDP figures can be found in Haver's USECON and USNA database. USNA contains virtually all of the Bureau of Economic Analysis' detail in the national accounts, including the integrated economic accounts and the recently added GDP data for U.S. Territories. The Action Economics consensus estimates can be found in AS1REPNA.

Chicago purchasing managers reported that their Business Barometer surged to 56.8 this month following a May decline to 49.3. The figure was at the highest level since January 2015, and exceeded expectations for 50.4 in the Action Economics Forecast Survey.

Haver Analytics constructs an ISM-Adjusted Index using the Chicago numbers, comparable to the overall ISM index to be released tomorrow. Our figure increased to 52.9, the highest level since October. During the last ten years, there has been a 61% correlation between the adjusted Chicago Purchasing Managers index and real GDP growth.

Increases in the component series were widespread. Most notable was a 14.4 point gain in the new orders index to 63.2, the highest level since October 2014. The order backlog measure also surged 12.0 points to the highest level (59.7) since March 2011. The production and inventory indexes increased moderately to 56.3 and 50.0, respectively.

The employment figure also declined 3.3 points to 45.0, the lowest level since November 2009. During the last ten years, there has been an 80% correlation between the employment figure and the m/m change in factory sector employment. Supplier delivery speeds quickened, prompting a decline in the index.

The prices paid reading eased to 55.7, leaving the Q2 average of 56.4 above the Q1 mean of 43.3. An increased 25% (NSA) of respondents reported paying higher prices while 10% paid less.

The MNI Chicago Report is produced by MNI/Deutsche Borse Group in partnership with ISM-Chicago. The survey covers a sample of over 200 purchasing professionals in the Chicago area with a monthly response rate of about 50%. The ISM-Adjusted headline index is calculated by Haver Analytics using these data to construct a figure with the ISM methodology. The figures can be found in Haver's SURVEYS database. The Consensus expectations figure is available in AS1REPNA.