The ink was still damp on my mid-year outlook in my last newsletter when the government reported this past Friday its first estimate of 2Q real GDP at only 1.2%, about half of the consensus forecast (and my own expectations). With a host of positive economic news in the past few weeks, most economists were expecting a decisive pick-up in economic growth. Well, we got it, but for the wrong reason: The Bureau of Economic Analysis (“BEA”), which compiles the GDP figures, on the same day also issued their annual benchmark update that retroactively revised its GDP estimates for the past three years, and they adjusted 1Q GDP back down to only 0.8% (from its prior “final” estimate of 1.1%). So, GDP did indeed accelerate this past quarter, but only relative to the downgraded 1Q figure, and well below expectations.
Don’t be surprised if this first estimate is ultimately adjusted upward in subsequent versions, which seems to be the pattern in recent quarters. Our economy is complex and increasingly hard for the BEA to measure, as services account for a rising share of the total. Still, these revisions tend to be relatively modest. [The average revision per quarter for the last three years was only ±50 bps and the net change only 20 bps as the adjustments were essentially offsetting in aggregate.] Moreover, the GDP data seems inconsistent with other indicators, including job growth, business and consumer surveys, and property markets.
And there was a silver lining in the GDP report. The lower growth this year is partly due to technical issues. Stripping out items like inventory adjustments and net exports, the core domestic economy (“Real Final Sales to Private Domestic Purchasers”) grew at 2.75% in 2Q and has been averaging a respectable 2.25% over the past year. A key reason is the strength of consumers, as spending grew by 4.2% annualized last quarter. Though unlikely to be sustained in future quarters, this was the strongest growth since 2014. Moreover, the latest consumer confidence survey shows consumers remain resilient, notwithstanding global economic weakness and election year uncertainty. Still, the drop in business spending is worrying and cannot be easily dismissed. Business investment fell 2.2% in 2Q, hurt by continued commodity weakness and the global economic slowdown.
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Andrew J. Nelson is Chief Economist for Colliers International in the United States. Based in San Francisco, he covers a mix of general economic topics as well as related issues that bear on the performance of property markets.