GDP Disappoints as Inventory Purge Hits Home
A tough week for U.S. data means the Fed may find it hard to raise rates in September.
It wasn’t a great week for the U.S. economy, with disappointing durable goods and GDP reports. The weakness in these two reports was bad enough to make it very difficult for the U.S. Federal Reserve to raise rates at its September meeting. The world equity markets took the bad economic news in stride as a number of high-profile tech stocks reported good earnings news and interest rates look likely to stay lower for longer. The S&P 500 was down just 0.1% on the week and the Ten-Year U.S. Treasury bond rate drifted lower again to 1.46% from 1.57% a week earlier, as one might expect with slowing economic data.
U.S. GDP grew just 1.2% in the second quarter, about half of what was expected. The consumer continued to do well but could not offset a massive 1.2% subtraction for inventories, a factor that often reverses itself in future quarters. We are nevertheless reducing our full-year growth rate to 1.5%-2.0%, a half-point reduction from our previous forecast. It is nearly impossible, mathematically, to recover from first-half weakness. In fact, we are raising our second-half outlook to over 3%, which was still not enough to keep us from lowering our full-year forecast.