The U.S. economy advanced at a 2.8% pace in the second quarter, exceeding RSM’s forecast of 2.4%, and was up by 3.1% on a year-ago basis.
The composition of growth was tilted toward productivity and rock-solid private sector and household economic activity.
For the first half of the year, average growth was 2.1%, which should put to rest any arguments that the economy is about to fall off a cliff.
Perhaps more important, the composition of growth was tilted toward productivity and rock-solid private sector and household economic activity.
The best aspect of the second-quarter report was the large advance in productivity-enhancing investment.
Outlays on equipment advanced by 11.6% and spending on intellectual property increased by 4.5%, which affirms our view that the American economy is in the midst of a productivity boom that will result in an improved standard of living across the economy.
The primary drivers of growth were household consumption, private investment and inventory accumulation.
As we expected, the large $71.3 billion increase in inventory accumulation implies that the greater-than-expected 2.8% increase in top-line growth overstated the true pace of growth in the economy.
That pace is most likely between 2% and 2.5%, which is in line with the 2% increase in real final sales and the 2.6% increase in real final private demand.
Our preferred measure of the real economy—real final private demand from domestic purchasers—advanced by 2.6% for the second consecutive quarter.
That rate is most likely closer to the true pace of growth in the economy given the large swings in inventory accumulation, trade and government spending, which real final private demand excludes.
Final sales to domestic purchasers, which excludes volatile inventory and trade swings, advanced by 2.7%, while gross domestic purchases increased by 3.5%. Disposable personal income advanced by 1%.
Policy implications
While we would have no problem with the Federal Reserve cutting its policy rate at its meeting this month, the Fed will surely take no such action.
Our baseline forecast of a September rate cut by the central bank remains intact and we still anticipate two 25 basis-point rate cuts before the end of the year.
The data
That increase of 1% in disposable income, which follows a year and a half of rising incomes above inflation, has created the conditions for a sustained increase in demand for services, which increased by 2.2%.
Outlays on goods increased by 2.5%, durable spending jumped by 4.7% and spending on non-durables increased by 1.4% on the quarter.
Read more of RSM’s insights on the economy and the middle market.
Gross private investment increased by 8.4% because of a 3.6% increase in fixed investment and the increase in outlays on equipment and intellectual property.
All of these gains were more impressive in light of a 3.3% decline in outlays on structures and a 1.4% drop in residential investment.
Imports increased by 6.9%, which was driven by a 7.7% advance in purchases of goods from abroad and a 3.6% increase in service imports.
Exports increased by 2% as demand for domestically produced goods increased by 1.7% and purchases of services advanced by 2.6%.
Overall government consumption increased by 3.1%, which was driven by a 3.9% jump in federal spending. Federal spending increased because of a 5.2% pop in outlays on national defense and 2.2% increase in non-defense spending. State and local spending increased by 2.6%.
The takeaway
Overall economic activity increased by a solid 2.1% in the first half of the year, while real final private demand increased by 2.6% over the same period.
Demand for services, which comprises roughly 85% of the domestic economy, increased by a sustainable 2.2% during the second quarter.
The composition of growth was one of the better mixes that we have observed in some time.
A strong labor market, rising real wages and a 1% increase in disposable income bolstered household spending, which advanced by a sustainable 2.3%.
More important, private sector investment jumped significantly, which supports the idea that the American economy is in the midst of a productivity boom.
That increase helps create a virtuous cycle, raising living standards across the country through lower inflation, low employment and rising real wages.
