Consumer Spending Fueled a Lot More GDP Growth Than Expected

If someone were inventing a curse to fit our immediate economic era, they might put it this way: “May you live in an age of interesting revisions.”

The Commerce Department on Thursday released its first revision of economic growth for the second quarter. It said gross domestic product (GDP) expanded at a three percent annual rate, up from the so-called “advance estimate” of 2.8 percent.

Economists had not seen this coming. The consensus forecast was for the second estimate to match the first. The range of estimates actually was slightly tilted to the downside, with the Econoday panel’s forecasts ranging from 2.6 percent to 2.9 percent. No one had penciled in three percent growth.

To get a feel for just how much stronger growth has been in the second quarter than economists thought, recall that the economy grew just 1.4 percent in the first quarter, and the projection for the second quarter prior to the first estimate’s release last month was for just 2.1 percent growth. In other words, the economy was growing more than 40 percent faster than economists thought.

The primary driver of the upward revision was consumer spending. Personal consumption expenditures were revised up to a 2.9 percent growth rate from 2.3 percent. Spending on durable goods rose at a 4.9 percent rate, two-tenths higher than the initial estimate, and spending on nondurables rose at a two percent rate, six-tenths higher than the prior estimate. Services spending was much higher, rising at a 2.9 percent annual rate compared with the earlier estimate of 2.2 percent.

Recall that earlier this month, the Department of Labor said that the benchmark revisions were likely to reduce employment growth over the 12-month period ending in March by 818,000. If that’s right, it means that the economy was growing much faster than expected in the quarter that began right after that with far fewer workers than thought. That would imply a pretty large and undetected gain in productivity.

More likely, the Labor Department’s estimate of the revision overstated its size. As we discussed earlier this month, the data the Bureau of Labor Statistics used to re-evaluate the employment numbers is largely taken from state unemployment insurance records that likely do not include unauthorized immigrant workers who are not eligible to collect benefits. As a result, the revised data very likely undercounted the work force.

Although not everyone agrees that the revision would have excluded many unauthorized immigrants, the increased consumer spending in the latest GDP data supports the idea. If there were more workers, it makes sense that there would be more spending. Certainly, this seems more plausible than an unexplained gain in productivity.

But Business Investment Was Even Weaker Than Thought

There was even more interest in the GDP revision than just the increase in consumer spending. While that part of the report received the most focus because it moved the headline GDP number up and implied a stronger economy, the business investment side of the report indicated a weaker economy than the initial estimate.

Nonresidential fixed investment, a proxy for business investment in future growth, was revised down from a 5.2 percent growth rate to 4.6 percent. Investment in equipment fell from a 11.6 percent growth rate to 10.8 percent. The growth of intellectual property investment was brought down to 2.6 percent from 4.5 percent.

None of those are recessionary numbers, but they do indicate that businesses were not as enthusiastic about future growth as the first GDP estimate suggested. And that, in turn, could lead to slower growth ahead. The Federal Reserve has been focused on weakness in the labor market as a justification for interest rate cuts but it should probably keep an eye on business investment.

The Mysterious Origins of the Interesting Times Curse

By the way, the curse with which we began this newsletter is a paraphrase of a saying that Robert F. Kennedy once attributed to China. Speaking in Cape Town, South Africa in 1966, the then-Senator from New York said, “There is a Chinese curse which says, ‘May he live in interesting times.’ Like it or not, we live in interesting times. They are times of danger and uncertainty; but they are also the most creative times in the history of mankind.”

There’s no evidence, however, that the curse has Chinese origins. If it does, it has escaped the peril of ever being written down in a recognizable form in any literature from China.

We know, however, that it was in circulation among the Chamberlains of Britain because U.S. Congressman Frederic Rene Courdet Jr. wrote in 1940 that a few years earlier he had been told of the curse in a letter from Sir Austen Chamberlain, half-brother of Prime Minister Neville Chamberlain, who attributed it to China. Perhaps Kennedy had heard of the curse from his father, Joseph P. Kennedy Sr. who served as the U.S. ambassador to the Court of Saint James when Neville was prime minister.

So, the curse about interesting times itself emerges from interesting times.