Does the Q2 GDP Growth Number Tell the Whole Story?

Excerpt from Raymond James Economist Dr. Scott Brown's latest economic commentary:

The Bureau of Economic Analysis revised its estimate of second quarter GDP growth from +1.9% to 3.3%, seemingly countering fears of recession.  However, much of that growth was concentrated in net exports.  It’s no secret that the soft dollar and relatively strong global growth have led to a revival in U.S. exports, which has helped offset the weakness in domestic demand.  However, it’s the consumer that drives the economic bus.  Consumer spending accounts for 70% of GDP.  A weak labor market and high energy costs have hammered household budgets.  Crude oil prices are off their mid-July peak, but are still relatively high.  The outlook for consumer spending growth for the remainder of the year is worrisome.

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The biggest driver of consumer spending growth is income.  Private-sector wages and salaries rose just 0.2% in July, following a 0.1% increase in June (+3.8% y/y).  In comparison, the PCE price index rose 0.6% in July, following a 0.7% increase in June (+4.5% y/y).  The decline in real wages has led to a decline in inflation-adjusted consumer spending, which fell 0.4% in July, following a 0.1% decrease in June (+0.7% y/y).  Energy prices have retreated from their mid-July highs, but the decline (at least so far) is not going to do much to fuel a pickup in consumer spending growth.  Moreover, labor market conditions are likely to deteriorate further in the remainder of this year, putting downward pressure on consumer spending growth.

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