Wow. While I like to think I get things right more often than not, I rarely get positive feedback this quickly. The economic numbers this morning were very interesting. Expectations for economic growth in the second quarter were substantially wrong, but for all the right reasons, which I pointed out yesterday.
Digging into the numbers (thanks to Capital Economics for a great analysis), we see the following:
- GDP growth was actually 1.7 percent last quarter, well over the expectation of 1 percent. This isn’t an unmixed gain, as growth in the first quarter was revised down from 1.8 percent to 1.1 percent, so the net result is that we’re at about the same place as expected. The difference is that much of the slowdown was in the first quarter rather than the second quarter, and the positive momentum I mentioned yesterday has already started—a good sign.
- Consumer spending grew faster than expected as well, at 1.8 percent, down from 2.3 percent in the first quarter. While you can argue that the decline is negative—and I would agree—the fact that overall growth accelerated even as consumer spending declined suggests that other areas of the economy picked up the slack. The broadening of growth beyond the consumer is also a positive sign, and, as I mentioned yesterday, there’s reason to believe consumer spending growth can accelerate in the second half of the year.
- Business investment was up by 4.6 percent, reversing a similar decline in the first quarter, and federal government spending declined less than expected, at 1.5 percent, which is much better than the 8.4-percent drop in the first quarter, while state and local spending actually ticked up by 0.3 percent. Per the previous bullet, we are seeing growth (or at least a slowing in the decline) in other sectors.
There were also revisions to prior years. What’s important there is that growth in 2012 was better than reported, but most of the excess came in the early part of the year. The second half of the year was weaker than initially reported, which contributes to the idea that we’re seeing a sustained acceleration in growth despite the weak first quarter of 2013.
Based on this morning’s report, I believe the points I made yesterday continue to make sense. Government spending is rising at both federal and state levels. Business is starting to invest. And consumers are continuing to increase their spending, with faster growth likely in the future. All of these factors point to a sustainable and accelerating recovery.
Another good data point this morning was the ADP employment release, which showed job gains of 200,000. This isn’t the official release, but it is relevant as it’s from one of the largest payroll processing companies out there—they have good and current data. The official numbers have come in stronger than the ADP numbers recently, which suggests that employment could be starting to grow at a faster pace as well.
The takeaway from all of the data released this morning is that the economy is in better condition than we expected, and we’re further into the tax increase/sequester adjustment process than had been thought. Overall, a very encouraging morning.