U.S. GDP Tops Expectations As Consumer Spending Flourishes

U.S. GDP Tops Expectations As Consumer Spending Flourishes

On the latest edition of Market Week in Review, Mark Eibel, director, client investment strategies, and Rob Cittadini, senior director, U.S. institutional, discussed second-quarter GDP (gross domestic product), global central-bank dovishness and Q2 earnings season.

U.S. economy still growing at solid pace

The U.S. logged a 2.1% GDP growth rate in the second quarter, Eibel said – slightly higher than consensus expectations of roughly 1.8%. “Simply put, the GDP number had a 2 in front of it – and that’s a good thing for markets and the economy,” he said. When added to the 3.1% growth rate observed during the first quarter, the U.S. economy expanded at a clip of approximately 2.5% in the first half of 2019, Eibel noted.

Digging further into the report from the Commerce Department, Eibel noted that consumer spending increased at an annualized rate of 4.3% during the April-to-June period, with government spending also seeing a boost. Capital expenditures, on the other hand, came in a little light, he said.

Overall, the GDP report contained few surprises, Eibel stated, which is likely what led to the muted market reaction. The bigger question now, he said, is whether the economy can continue to grow at a similar pace during the second half of the year. “This will likely prove to be a bit more of a challenge,” he remarked.

Fed rate cut expected at upcoming policy meeting

The U.S. Federal Reserve (the Fed) is widely expected to lower interest rates at the conclusion of its July 30-31 policy meeting, Eibel said. He and the team of Russell Investments strategists believe that a 25-basis point cut is most likely, especially in light of the Q2 GDP reading. “In our opinion, an economic growth rate above 2% makes it harder to justify slashing rates by 50 basis points,” he stated, adding that one could argue a rate cut isn’t even necessary with economic growth remaining solid. However, the Fed has strongly signaled that a reduction in interest rates is on the way, Eibel said, explaining that markets would likely react poorly if monetary policy was left unchanged.

Shifting to the European Central Bank (ECB), Eibel noted that while it held rates steady at its July 25 meeting, the central bank also struck a very dovish tone about future monetary policy. “The ECB signaled that rate cuts could be in store soon, and that it may also re-start its quantitative easing (QE) program,” Eibel noted. This is just the latest example of how central banks around the globe have pivoted to a dovish tone in 2019, he added.

Preliminary Q2 earnings season results

Transitioning to second-quarter earnings season, Eibel said that so far, a majority of companies are beating expectations, with year-over-year growth rates remaining largely flat. The sales growth numbers, however, are a bit more depressed, he noted. “If you take the sales numbers as an indication of where the economy could be headed, there’s certainly a signal that softer times may be around the corner,” Eibel said.

Broadly speaking, the global economy continues to slow, he noted, with a marked weakening in the manufacturing sector. However, retail numbers in the past several months have been surprisingly strong, including in the U.S., Eibel pointed out. Ultimately, consumer strength really appears to be what’s keeping the economy churning at the moment, he said. “The key question moving forward is whether the U.S. consumer will remain strong enough to hold growth rates above 2%, or whether other factors – such as ongoing trade tensions and declining business investment – will start dragging the economy down more,” Eibel concluded.

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