U.S. Q2 GDP: It's The Trade Uncertainty Affecting It

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by: Tim Worstall
Summary

The domestic components of U.S. GDP for the second quarter were looking good - consumer spending, incomes, and so on.

It's the trade issues that seem to be slowing matters, which, given the uncertainty of tariff policy, seems reasonable.

It's not even so much the tariffs themselves, it's the uncertainty about what they're going to be and when.

Uncertainty Is The Big Investment Killer

The biggest variable - that is, not the biggest component, but the thing which varies the most - in the economy over the business cycle is business investment. Uncertainty decreases this significantly. Which is the only real problem to be seen in the US economy at present.

What is trade - tariff perhaps - policy going to be and when? The knock-on effects of that uncertainty seem to be greater than the effects of the tariffs themselves. Thus, economic growth rather seems to depend upon opinions of what Trump is going to do next.

Second Quarter U.S. GDP Figures

US GDP (US GDP Growth From BEA)

We have the second estimate - the first is a snapshot dependent upon a lot of forecasts, the third is the final one but is too far in the future to be useful as a policy guide - for US GDP. The revision is only down 0.1% from that first at 2% on an annualised basis. This is clearly down from the Q1 figure of 3.1%.

As far as domestic numbers go, there's nothing bad to see except for the business investment number. And that appears to be heavily influenced by trade policy:

The second-quarter increase in real GDP reflected increases in consumer spending and government spending, while inventory investment, exports, housing investment, and business investment decreased. Imports, which are a subtraction in the calculation of GDP, increased.

Yes, OK, that increase in imports doesn't look all that good but that's largely - so we all think at least - people trying to beat tariff increases. We've got increases in consumer and government spending, the usual causes of a growing economy.

The one bit that worries is that business investment.

The Importance Of Business Investment

Of all the GDP components, it's that business investment which varies the most across the business cycle. In fact, contrary to many political claims that it's consumer spending which is 70% of the economy, therefore, consumer spending is the most important isn't true. How much the business sector invests is the great variable to keep an eye upon. This is where Keynes' comment that recession depends on the animal spirits of businessmen comes from.

So, if we're seeing a fall in that business investment, that's when we should start to have at least a bat's squeak of worry. And it doesn't really matter why it's falling in one sense. In another, it matters a great deal. Because if we know why, then we can stop doing whatever is causing it to fall.

Uncertainty On Trade Policy

So, what's driving the fall in business investment? Uncertainty about trade and tariffs. As Moody's Analytics says:

The driver that continues to surprise is President Trump's trade war with China and a long list of other trading partners, which has undermined business sentiment, has been weighing on business investment decisions, and has even begun to impact hiring. It has already done meaningful economic damage. The most direct hit to the economy is from the tariffs, which act as a tax increase on American businesses and consumers.

That's the direct effect but also:

U.S. businesses appear spooked by the president's trade policy. Business sentiment has fallen significantly since the war broke out in earnest last fall. If there is a cessation of hostilities in the trade war, and with some help from the Fed, the economy should weather the storm and continue to grow. However, risks will be high until the trade war is settled and growth stabilizes at or above potential.

Until we know what Trump's going to do and when, we're going to continue to see this uncertainty.

My View

I'm not in favour of the trade war and never have been on other grounds. But the effect upon business sentiment is the only worrying factor in the US economy's growth projection at present. It's not even what is being done - it's that no one knows what will be done. At which point new plant doesn't get built, investments don't get made.

The Investor View

The moment we gain greater certainty on the trade war, then the US economy should start growing substantially again. Because our domestic indicators are looking good. Other than just that impact of the uncertainty upon investment.

So, take a declaration of victory over trade as being a positive sign. Not because it is a victory but because it will signal the end of the uncertainty.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.