Today brought two pieces of good economic news for the Trump administration, even if more pressing events overshadowed both of them. The Bureau of Economic Analysis upwardly revised its second quarter estimate of overall growth in the US economy, raising the annualized GDP improvement from 2.6% to 3.0%. That made Q2 the best quarter in over two years, if the final estimate next month sustains this adjustment:
Real gross domestic product (GDP) increased at an annual rate of 3.0 percent in the second quarter of 2017 (table 1), according to the “second” estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 1.2 percent.
The GDP estimate released today is based on more complete source data than were available for the “advance” estimate issued last month. In the advance estimate, the increase in real GDP was 2.6 percent. With this second estimate for the second quarter, the general picture of economic growth remains the same; increases in personal consumption expenditures (PCE) and in nonresidential fixed investment were larger than previously estimated. These increases were partly offset by a larger decrease in state and local government spending (see “Updates to GDP” on page 2).
The most significant upward revision, both economically and politically, was likely on private domestic investment. The initial estimate only clocked in at 2% after a decline of 1.2% in Q1. The new estimate shows domestic investment increased by 3.6%, almost double the rate of the first estimate. Other than an apparent outlier in Q4, it’s the first time in ten quarters that investment rose by more than 3%.
Consumer spending also improved significantly. Personal consumption expenditures rose 3.3% over Q1, up from 2.8% in the first estimate and 1.9% in Q1. It’s the first time in a year that PCE growth has met or exceeded 3% in a quarter, and a signal of stronger consumer confidence. If consumers are feeling good enough to start spending again at this rate, that’s good news for the White House.
Reuters reports that other fundamentals point to a strong transition into the third quarter, and that the impact of Hurricane Harvey may be more limited than one would guess:
Retail sales and business spending data so far suggest the economy maintained its stamina early in the third quarter. Economists saw a limited impact on growth from Hurricane Harvey, which devastated parts of Texas.
“The impact on the national economy will be minor,” said Gus Faucher, chief economist at PNC Financial Services in Pittsburgh. “While some output will be lost in the wake of the storm, most of the difference will be made up in the months ahead.”
Growth estimates for the third quarter are as high as a 3.4 percent rate.
The big risk to Q3 is probably with energy prices. Refineries and ports will be shut down for at least a little while, and the gasoline markets in particular are brittle due to formulation varieties and a lack of alternative facilities. There is probably enough slack to get through easily, but spot prices will rise and impact businesses across a broad range for some of Q3.
The other good news came from ADP, which estimated that the private sector had its best expansion in four months. They predict that labor shortages will finally start driving wages higher, and warned that the upcoming BLS report on Friday may miss some of this growth:
Private sector employment increased by 237,000 jobs from July to August according to the August ADP National Employment Report® . Broadly distributed to the public
each month, free of charge, the ADP National Employment Report is produced by the ADP Research Institute® in collaboration with Moody’s Analytics. The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis. …
“In August, the goods-producing sector saw the best performance in months with solid increases in both construction and manufacturing,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “Additionally, the trade industry pulled ahead to lead job gains across all industries, adding the most jobs it has seen since the end of 2016. This could be an industry to watch as consumer spending and wage growth improves.”
Mark Zandi, chief economist of Moody’s Analytics, said, “The job market continues to power forward. Job creation is strong across nearly all industries, company sizes. Mounting labor shortages are set to get much worse. The initial BLS employment estimate is often very weak in August due to measurement problems, and is subsequently revised higher. The ADP number is not impacted by those problems.”
Actually, ADP undershot the BLS the last two months, so perhaps it’s the BLS’ turn in August. Bear in mind that 237K is a solid but not terribly spectacular result, too. Despite claims from both the Obama and Trump administrations that we had achieved full employment, we have not seen the wage increases that would produce. That indicates a significant amount of potential labor still sitting on the sidelines, and a workforce participation rate that still reflects exactly that.
Still, anything that comes in close to 237,000 on Friday will look good enough, especially with GDP growth once again perking up.