- by New Deal democrat
Today’s GDP report for Q2 was pretty much as we expected, i.e., payback from the front-running of import tariffs in Q1. But as usual, my main focus is on the two long leading components.
The headline was a 3.0% annualized increase in real GDP, rebounding from the -0.5% decrease in Q1 (blue in the graph below). But “core” GDP, i.e., real final sales to domestic purchasers, tells a somewhat different story, decelerating from 1.9% annualized in Q1 to 1.2% in Q2 (red):
In fact “core” GDP growth, while positive, was the lowest since the end of 2022. But again, we know that consumers accelerated some purchases into Q1 that they otherwise would have done in Q2 or even later, so this deceleration is also somewhat misleading.
Now let’s look at the impact of tariffs. Producers and wholesalers in the US ran up their inventories in Q1 in anticipation of the increased tariffs, meaning there was likely to be payback in Q2. And there was (blue in the graph below), as inventories declined -5.8% on an annualized basis. Which unsurprisingly is in accord with the fact that after rising in Q1, imports fell -8.8% (red). If there was a surprise at all, it was that exports declined in Q2 as well, by -4.4% annualized, after increasing 1.0% in Q1 (gold):
So the headline takeaway for me is slowing growth in Q2 with a decline in exports (which of course is not supposed to happen in the Tariffistas’ utopia).
Now let’s look at the two long leading components of GDP.
First, in accord with the recessionary housing data that I have been writing about each month, both nominal (blue) and real (red) private residential investment in Q2 declined, by -3.2% and -4.6% annualized, respectively:
Note that this is the second quarterly decline in a row in real terms.
Here is the longer term view, showing that housing tends to turn down more than a year before th economy as a whole:
If housing was negative, proprietors’ income (blue), which is a proxy for corporate profits (red) (which won’t be reported for another month) was positive, increasing 3.4% annualized on a nominal basis. Even after taking into account the GDP deflator, which increased at a 2.0% annualized rate, business income was positive.:
This is of a piece with what has been reported on Wall Street for Q2 so far.
Even without the complicating picture from tariffs, the background long leading indicators remain mixed, with elevated but rangebound interest rates and term spreads, increasing real money supply, and mixed real consumer spending on goods, in addition to the negative housing impacts but continuing positive profits.
I anticipate the combined impact of tariffs and the recent tax bill to negatively impact the economy as a whole, as higher prices for consumers and cutbacks in benefits more than counterbalance the tax giveaways to the wealthy. But the Q2 GDP report shows no significant effects on the bottom line yet.
