As you commence your summer strategic planning team discussions, a look at the growth of the U.S. economy may be helpful.
Q2 GDP slowed to 2.1 percent, but showed both strengths and weaknesses as the GDP growth “walk” below indicates.
Three sectors drove the Q2 results. Services, Durable Goods and Non-durable Goods contributed 2.1 percentage points to this quarter’s growth rate. The consumer is still spending and demand in the Services sector remains solid.
And, as was expected, the change this quarter in Net Exports and Inventories reversed their unusually large contribution of Q1 2019. These areas weighed negatively on GDP growth by 1.6 percentage points. Typically, these two components should have a negligible contribution to GDP growth - not the large positive seen in Q1 or the significant negative seen this quarter.
The continued lack of Business investment in Q2 raises the most important question - when will Business add to plant and equipment? What is weighing on its view of the near-term future?
Finally, Residential Investment continues to be a non-contributor, even in this favorable interest rate environment. Will this continue?
Two sectors had double digit growth in Q2: Durable Goods at 12.3% (twice the trend since 2010) and Non-defense Federal Spending at 15.1% (30X trend since 2010). The second category is probably not on anyone’s list for this elevated level of growth.
The largest sector of the economy - Services - had solid growth of 2.5% (slightly above 2% trend since 2010). The next largest - Non-durable Goods - expands by 5.9% annualized in Q2 (3X trend since 2010)
The Residential sector contracted by 1.5%.
And Business Investment in Structures fell a dramatic 11% (~3% trend since 2010). Business Investment in Equipment was up only 0.7% (6% trend since 2010). What is causing the Business sector to hold back on these critical investments?
The economy continues to grow, albeit more slowly. There are no signs that the economy will contract at this time. The employed consumer continues to spend. Labor market remains solid. But is employment growth a too cautious trade off for lack of business capacity investment? Are trade, weak global economic growth and political turmoil creating such uncertainties that Business is holding back on investing for future growth?
With the economic cycle reaching that record 120 months of age this quarter, there is much to celebrate! But we all know that the next question for the economy will be “What have you done for me lately?” And, while the economy chugs along, should you be planning for slower economic growth over the next five years and for 2020?
Hold your strategic planning session, have those discussions with your team, and see what conclusions you draw!