US GDP: looking pastthe noise - BBH

Analysts at Brown Brothers Harriman explained that the weakness of Q2 GDP shook confidence.  

Key Quotes:

"However, investors may be more rattled than policymakers.  Our understanding is that the Fed's leadership tries to focus on the signal and look past the noise.  In terms of GDP, the signal comes from final domestic demand, which excludes inventories and net exports, leaving the components of GDP that monetary policy can directly impact.

The main reason that the initial estimate of Q2 GDP fell well short of market and official expectations was due to the continued liquidation of inventories.  The strong consumption (4.2%), which was nearly three-times larger than the Q1 increase (1.5%), was met by inventories rather than new output.  It was the third consecutive quarterly liquidation, and it appears to have largely run its course.

At the same time, US consumption appears to have begun Q3 on a firm note.  US auto sales rose from an annualized pace of 16.61 mln in June to 17.77 mln in June.  Domestic brands accounted for the lion's share of the increase.  It is the strongest sales since last November.   The industry figures do not always translate into retail sales, but if they do, there may be upside risks to the median forecast of 0.4% for July, which the US data highlight of the week ahead.

The components of retail sales, which are used for GDP calculations, had their strongest quarterly advance in Q2 since Q1 12. After rising 0.5% in May and June, the pace may have slowed to 0.3%.  That would match the 12-month average.  Still, as we approach the middle of the quarter, the Atlanta Fed's GDPNow tracker puts Q3 growth at 3.8%, helped by an 8.8% increase in private sector investment.

An alternative methodology at the NY Fed puts Q3 growth at 2.6%.  Of course, the Atlanta Fed estimate, if true, is preferable.  But even under the NY Fed's less optimistic results, after three-quarters of disappointment, the economy bounces back above trend.  Even if we have struggled to anticipate the quarterly pattern of growth, the important point is that the US economy is re-accelerating as the headwinds from oil (on investment, manufacturing, etc.) and the inventory cycle dissipate, and not entering a recession as so many naysayers warned.  

Incidentally, a GDP tracker has been launched by the Bank of Italy for the eurozone.  The coincident indicator (hence it is dubbed COIN) was updated at the end of July.  It estimates Q3 GDP at 0.31%, up from 0.29% in June.  The initial estimate of 0.3% in Q2 will likely be confirmed this week."