• Although strong Q2 GDP growth missed expectations…
  • …the miss was mainly due to an inventory drawdown and import leakage effects…
  • …that reflect supply chains struggling to catch up to demand
  • The broad tone of the report was strong on details
  • Core inflation hit a 38 year high and year-ago base effects had nothing to do with it

US Q2 GDP, q/q % SAAR:
Actual: 6.5
Scotia: 7.7
Consensus: 8.4
Prior: 6.3 (revised from 6.4%)

While Q2 US GDP growth missed expectations at 6.5% (consensus 8.4%), the underlying details (here) were better than the headline growth number. The overall tone of the report lends evidence to the narrative that there is a rotation of the sources of growth relatively away from goods consumption (though still strong) and housing, toward services, investment and exports. That is a constructive indication of resilient growth not only on levels (chart 1) but also its shifting composition.

The USD initially dipped on the headline miss but subsequently rallied after considering the drivers. The 10 year Treasury yield performed similarly in the report’s aftermath.

The growth miss was primarily attributable to drags from inventory and import leakage effects. Chart 2 shows the weighted contributions to GDP growth that break out the accounting categories. Those two drivers reflect supply chain challenges in keeping up with demand. An import surge is attempting to address inventory shortfalls and replenish supply chains for rebounding demand.

Inventories subtracted 1.13 percentage points from GDP growth in terms of the weighted contribution. Imports were higher which in a GDP accounting sense gets recorded as a leakage of domestic economic activity abroad and so the import gain subtracted 1.1ppts from overall GDP growth.

Consumption added 7.8ppts to growth in Q2, again in weighted contribution terms. 5.1 ppts came from services consumption and 2.7 ppts came from goods consumption.

Housing investment dragged 0.5 ppts off Q2 growth which is the first drag on growth in four quarters. The US achieved strong GDP growth despite housing’s waning influence and as supply chains struggle to keep up.

Nonresidential investment added 1.1 ppts mostly through equipment spending as structures spending was a mild drag on growth.

Gross exports added 0.6 ppts but because of the import leakage effect with higher imports the net exports contribution to growth was -0.44 ppts.

Government spending subtracted 0.3 ppts from annualized Q2 growth, all at the federal level as state/locals added a bit to growth.

Core PCE inflation was up 6.1% q/q and the prior quarter was revised up to 2.7% q/q from 2.5%. Chart 3 serves as a reminder that core PCE inflation is running at its hottest pace since 1983. Being a quarter-on-quarter gauge, this is not about base effects. 

DISCLAIMER

This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor any of its officers, directors, partners, employees or affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents.

These reports are provided to you for informational purposes only. This report is not, and is not constructed as, an offer to sell or solicitation of any offer to buy any financial instrument, nor shall this report be construed as an opinion as to whether you should enter into any swap or trading strategy involving a swap or any other transaction. The information contained in this report is not intended to be, and does not constitute, a recommendation of a swap or trading strategy involving a swap within the meaning of U.S. Commodity Futures Trading Commission Regulation 23.434 and Appendix A thereto. This material is not intended to be individually tailored to your needs or characteristics and should not be viewed as a “call to action” or suggestion that you enter into a swap or trading strategy involving a swap or any other transaction. Scotiabank may engage in transactions in a manner inconsistent with the views discussed this report and may have positions, or be in the process of acquiring or disposing of positions, referred to in this report.

Scotiabank, its affiliates and any of their respective officers, directors and employees may from time to time take positions in currencies, act as managers, co-managers or underwriters of a public offering or act as principals or agents, deal in, own or act as market makers or advisors, brokers or commercial and/or investment bankers in relation to securities or related derivatives. As a result of these actions, Scotiabank may receive remuneration. All Scotiabank products and services are subject to the terms of applicable agreements and local regulations. Officers, directors and employees of Scotiabank and its affiliates may serve as directors of corporations.

Any securities discussed in this report may not be suitable for all investors. Scotiabank recommends that investors independently evaluate any issuer and security discussed in this report, and consult with any advisors they deem necessary prior to making any investment.

This report and all information, opinions and conclusions contained in it are protected by copyright. This information may not be reproduced without the prior express written consent of Scotiabank.

™ Trademark of The Bank of Nova Scotia. Used under license, where applicable.

Scotiabank, together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including; Scotiabank Europe plc; Scotiabank (Ireland) Designated Activity Company; Scotiabank Inverlat S.A., Institución de Banca Múltiple, Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Casa de Bolsa, S.A. de C.V., Grupo Financiero Scotiabank Inverlat, Scotia Inverlat Derivados S.A. de C.V. – all members of the Scotiabank group and authorized users of the Scotiabank mark. The Bank of Nova Scotia is incorporated in Canada with limited liability and is authorised and regulated by the Office of the Superintendent of Financial Institutions Canada. The Bank of Nova Scotia is authorized by the UK Prudential Regulation Authority and is subject to regulation by the UK Financial Conduct Authority and limited regulation by the UK Prudential Regulation Authority. Details about the extent of The Bank of Nova Scotia's regulation by the UK Prudential Regulation Authority are available from us on request. Scotiabank Europe plc is authorized by the UK Prudential Regulation Authority and regulated by the UK Financial Conduct Authority and the UK Prudential Regulation Authority.

Scotiabank Inverlat, S.A., Scotia Inverlat Casa de Bolsa, S.A. de C.V, Grupo Financiero Scotiabank Inverlat, and Scotia Inverlat Derivados, S.A. de C.V., are each authorized and regulated by the Mexican financial authorities.

Not all products and services are offered in all jurisdictions. Services described are available in jurisdictions where permitted by law.