US Q2 GDP was more teeth-gnashing for investors than the Fed - BBH

Research Team at BBH, suggests that their impression is that the low US Q2 GDP was more teeth-gnashing for investors than the Federal Reserve. 

Key Quotes

“Past comments by Yellen suggests a focus on GDP excluding inventories and exports.  Consumption, which was identified in June as a concern, rose at 4.2% annualized pace in Q2 after a 1.5% clip in Q1.  Consumption added 2.8 percentage points to GDP.  The other components of GDP, (government spending, business investment, and net exports) subtracted 1.6 percentage points from GDP.  The result was 1.1% GDP, adjusted for rounding. 

Inventories are not a large part of GDP, but they are volatile, and seemingly a challenge to forecast accurately.  The introduction and dispersion of better inventory management (e.g., just-in-time inventories, register-to-inventory interface) apparently has not ended the inventory cycle's role of driving the larger business cycle.  The three-quarter drawdown in inventories is probably the single most important factor behind the nine-month streak of growth below 2% (for the first time four years). 

The rundown in inventories, however, is expected to lead to greater output, especially if demand holds up.   An increase in July auto sales (17.2 mln annualized pace vs. 16.61 mln in June) points to a solid start for Q3.  It should not be surprising if economists shift some of the growth they had anticipated for Q2 into the second half. 

In many ways, it seems that the August cake is already baked.  The BOJ and ECB have signaled reviews in September.  The September FOMC meeting is late in the month, which arguably makes the July high frequency data less significant, and in any event, is unlikely to boost expectations for a September hike. 

Yellen's presentation at the Jackson Hole confab at the end of the August may be more important than the data per se.  Advance reports should make the first estimate of GDP more accurate, and time will tell, but for the time being it, investors need to keep in mind that it is often subject to statistically significant revisions.  The first revision is due August 26.”