US economy defies gravity
Economy continues to defy gravity – Q2 GDP surprised to the upside, with activity expanding 2.4%, above our and consensus expectations (1.9% and 1.8% respectively). As we expected, the strength was driven by both resilient consumption (+1.6% q/q saar) and a rebound in fixed business investment (+7.7%), with the upside surprise driven by somewhat stronger consumption and a bigger fall in imports than we had pencilled in. Alongside the Q2 report, Q1 GDP was also revised up significantly, to 2.0% from 1.3% previously, with the revision driven by similar factors that led to the Q2 upside surprise – higher consumption and lower imports. Indeed, consumption was revised upwards to show a 4.2% q/q annualised expansion (3.8% previously) in Q1, while the contribution from net exports was revised sharply higher to a 0.6pp positive contribution (-0.1pp previously). All told, GDP expanded at a somewhat above-trend pace of 2.2% in the first half of 2023.
Durable goods consumption still unsustainably high
While the resilience of the US economy is on the surface a positive development, particularly given the disinflationary progress we have seen over the past half year, we note some concerning trends below the surface. First, durable goods consumption remains unsustainably high. While durables consumption was essentially flat in Q2, this followed a 16% surge in consumption in Q1. In level terms, durables consumption remains 34% above the pre-pandemic level (this compares with 9% for non-durables, and 7.8% for services). While there has been progress in the post-pandemic shift from goods back to services, this process looks far from complete – suggesting a significant part of the economy is highly vulnerable to a correction. As if to portend such a development, and as alluded to earlier, imports have fallen sharply in recent quarters – in Q2 by 7.8% annualised. This suggests retailers are bracing for a downturn in goods consumption, which we see reflected in the weakness in global manufacturing.
Economic strength poses upside inflation risks
As acknowledged by Fed Chair Powell in yesterday’s post-FOMC press conference, ‘stronger growth could lead to more inflation’. While inflation has trended lower – confirmed in today’s GDP report which showed core PCE price growth slowing to 3.8% annualised from 4.8% in Q2 – persistent strength in the economy runs the risk of reigniting inflationary pressures, particularly given the still ultra-tight labour market. We therefore continue to think the next leg of disinflation will prove to be more painful for the economy than what we have experienced so far. See our June Global Monthly for more.