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  Dr. Sohn's Commentary

Second Quarter GDP

July 28, 2017

Economic growth during the second quarter has rebounded to an annual rate of 2.6 percent, up from the revised 1.2 percent during the first quarter. Final sales also grew at an annual rate of 2.6 percent because the inventory effect was neutral. Consumption and equipment spending were sources of strength while residential construction and state & local spending were drags. PCE price index rose only 0.3 percent even though PCE-core increased 0.9 percent.

After the winter blues, the economy has rebounded. Consumers led the parade. More jobs, rising wages and the stock market which keeps hitting new highs and rising home equity triggering the wealth effect supported consumer spending. Most of the increase in consumer spending came from mundane items like groceries, clothes and healthcare while car sales remained soft.

Housing was a big drag on growth. Demand for houses are strong, but builders can’t build them fast enough as there are severe labor shortages in the industry. After a surge during the previous quarter, there were fewer oil rigs put in place. Commercial construction was lackluster.

However, don’t extrapolate the second quarter performance into the future. What is in store does not look encouraging. The economy is suffering from skilled labor shortages which are vital for healthy economic growth. Carpenters and plumbers are hard to get. Software engineers are almost impossible to find in Silicon Valley. Crude oil prices have dipped again discouraging capital expenditures in this sector. The stock market is hovering in the over-valued territory. Used cars are such a bargain that new car sales could be hurting in coming months.

What is happening in Washington has been disappointing. Earlier this year, most economists assumed a big boost to the economy from the Trump stimulus. Alas, those assumptions have all been taken out relegating economic growth to its long-term trajectory of around 2 percent or less. The stock market could be hurt once the earnings momentum fizzles out.  

The Federal Reserve should be encouraged by the second quarter rebound. The FOMC could pull the trigger again at either the September or December meeting and commence balance sheet normalization. Employment gains have been supportive of economic growth. However, the inflation gauge remains well below the central bank’s target of 2 percent pointing to caution for the Fed.


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