U.S. economic growth slowed to 2.1 percent annualized in the second quarter from 3.1 percent in the first quarter. Personal consumption expenditures (PCE) rebounded sharply, as expected, while government spending contributed an outsized 0.9 percentage point to growth, the most since mid-2009. However, negative contributions were seen from housing, business capital expenditure, inventory investment, and net exports. Looking ahead, we expect the economy to grow at a 1.5–2.0 percent pace in the third quarter.
The second-quarter gross domestic product (GDP) release also featured annual revisions to the five prior years of data, which showed that growth peaked in year-over-year terms in the second quarter of 2018, earlier than previously thought. An upwardly revised personal saving rate gives consumption room to run, but downwardly revised and shrinking corporate profits will continue to pressure investment spending and could begin to weigh more heavily on hiring.
Latest GDP Data Shows Growth Peaked Earlier Than Thought
Real GDP, YoY% Change
The second-quarter GDP release featured annual revisions to the five prior years of data, which showed that growth peaked in year-over-year terms in the second quarter of 2018, earlier than previously thought.
Source: Guggenheim Investments, Haver Analytics. Data as of 6.30.2019.
With growth in the first half of the year coming in somewhat above potential, the labor market continued to strengthen, albeit at a slower pace than the year before. Net monthly payroll gains averaged 141,000 in the six months through July, down from 236,000 during the same period in 2018. This was enough to push the unemployment rate down by 0.2 percentage point to 3.7 percent. While the labor market remains strong, we believe the sharp slowdown in aggregate hours worked—a component of our U.S. Recession Dashboard—foreshadows a deterioration in labor market conditions in 2020.
After a weak start to the year, core inflation picked up in the second quarter but remained below the Fed’s 2 percent target at 1.8 percent annualized. We expect inflation to firm a bit further in the second half of 2019.
Although the U.S. economy is in good shape overall, on July 31 the Fed announced its first rate cut since 2008 amid growing downside risks to policymakers’ baseline growth and inflation forecasts. Key among these are slowing global growth, the threat of additional U.S.-China tariffs, and a possible hard Brexit, the odds of which have increased with the ascendance of Boris Johnson as prime minister of the United Kingdom. While a possible U.S. fiscal contraction in 2020 was averted by the recently signed budget deal, we expect two more Fed rate cuts in 2019 as Chair Jay Powell seeks to sustain the expansion. In our view, this could serve to embolden the White House to impose new tariffs on China and Europe later this year, which would in turn further cloud the outlook for global growth.
Mounting Downside Risks Drive the Fed into Easing Mode
Net Upside/Down Risk to SEP Projections: % of FOMC Participants
Although the U.S. economy is in good shape overall, on July 31 the Fed announced its first rate cut since 2008 amid growing downside risks to policymakers’ baseline growth and inflation forecasts.
Source: Guggenheim Investments, Federal Reserve. Data as of 6.19.2019.
—Brian Smedley, Head of Macroeconomic and Investment Research; Maria Giraldo, CFA, Managing Director; Matt Bush, CFA, CBE, Director
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Brian Smedley, Chief Economist and Head of Macroeconomic and Investment Research, and Portfolio Manager Adam Bloch provide our macro and markets outlook.
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