US Q2 GDP: Goods news on growth and even better news on inflation

Real GDP accelerated in Q2, rising 2.4% QoQ annualized, up from 2.0% in Q1 and better than consensus expectation of 1.8%. The acceleration was driven by a solid increase in business investment and inventories reversing its outsized drag last quarter. On the other hand, personal consumption and government spending both slowed, but growth remains solid. Stripping out the volatile trade and inventories, domestic final sales decelerated to a still strong pace of 2.3%.

Inflation surprised on the downside, as the GDP deflator came in at 2.2% QoQ annualized, down from 4.1% in Q1 and below consensus expectation of 3.0%. Importantly, quarterly core PCE inflation came below expectations, raising downside risks to tomorrow’s monthly print, where consensus is looking for a print of 4.2% YoY.

Looking into the details, the acceleration in business investment was largely due to transportation and the CHIPS Act. Auto production rose in Q2 as inventories are being rebuilt, and aircraft spending rose as travel demand recovered further. Construction of manufacturing plants rose to the highest since the data series began in the 1960s, as the CHIPS Act incentivized building of plants for semiconductors. However, elsewhere, investment remains lukewarm and the latest durable goods report suggested a loss of momentum for core capex spending going into the third quarter.

On the consumer side, consumption slowed in Q2 after a blockbuster quarter, but services spending continued to be the backbone of growth, contributing 100bps to GDP growth. Goods consumption moderated further as households continued to shift towards services spending. Housing investment fell again as limited inventory constrained home sales, but the pace of decline slowed after large contraction in 2022. Residential construction has picked up for a few months and housing should start to be a small boost to growth in coming quarters.

Inventories were a modest 0.1ppt boost to GDP, after a substantial 2.1ppt drag in Q1. This was offset by a small drag from net exports, where exports declined more sharply than imports. Government spending grew solidly at 2.6% as strong state and local government hiring boosted growth.

Overall, the US economy continues to show extraordinary resilience despite monetary constraint and credit tightening. The labor market remains tight as shown in the latest decline in jobless claims. Meanwhile, inflation has shown encouraging signs of decline but the level remains elevated. Forward-looking indicators are mixed, with rebounding consumer sentiment, still sluggish manufacturing PMIs, and some hard data starting to lose momentum, but gradually. We continue to expect a growth slowdown going into the second half of the year, but see upside risks to our 2023 real GDP forecast of 1.4% YoY. 

Real GDP growth contribution by spending categories

Q2 Real GDP growth contribution by detailed spending categories

Real GDP growth – growth accelerated in Q2

Real residential investment – still negative but pace of decline slowed

Real equipment investment – strengthened due to transportation 

GDP deflator – goods news on inflation 

Source (all charts above): Pictet Wealth Management, Bureau of Economic Analysis, as of 17.07.2023