US GDP Growth -- Just Half of What Was Forecaast!

Deutsche Bank's Dominic Konstam summarized GDP data yesterday:

The latest GDP release favors our hypothesis of an imminent endogenous labor market slowdown over a more optimistic scenario in which productivity will replace employment as the engine for growth. With real GDP growing at just 1.2%, there is little evidence that productivity is ready to do the heavy lifting. We are particularly concerned because annual nominal growth has slowed to 2.4%, essentially a cyclical trough.

Deutsche Bank calculates, on an annual basis, the non-consumer portion of the economy is shrinking, i.e., in a recession, not only in real terms but also in nominal terms.

Business spending is in recession. Equipment spending fell -3.5% in the quarter and is down nearly -2% over the last year. At the same time, spending on structures was down -7.9% in the quarter and -7.0% over the last four quarters. The only pocket of strength within the nonresidential fixed investment sector was intellectual property products; this category, which includes software, R&D, and entertainment, literary and artistic originals, advanced a modest 3.5% in the quarter, and at a similar rate over the last year. While some of the weakness in investment spending has been due to the collapse in oil prices, non-energy-related spending has been soft, too, reflecting weak internal and external demand, excess slack and corporate uncertainty regarding the outcome of this year’s Presidential Election. While investment spending may get a slight boost over the next couple of quarters as the energy investment drag abates, we expect corporate outlays to remain stagnant until next year.

Housing stumbles. Residential investment declined -6.1% last quarter following a 7.8% in the previous quarter. Since the sector bottomed in Q3 2010, it has grown at an annualized rate of 8.6%. Elevated housing affordability coupled with low vacancy rates tells us that residential investment should rebound this quarter and next.

We should expect a sharp pullback in spending this quarter. Indeed, the recent softness in motor vehicles sales, which are one of our five favorite economic indicators, may be hinting as much. We can see in the chart below that the toppyness in vehicle sales does not bode well for the underlying trend in consumer spending. Besides, as we have written on numerous occasions, gains in consumer spending alone are not enough to prevent a broader economic downturn. There have been numerous economic cycles when year-over-year consumer spending was positive but the economy still entered a downturn. Witness what happened during the 1981 to 1982 and 2001 recessions.

 And, monetary policy has effectively exhausted itself, so there is little that policymakers can do to offset any further slowing in demand. With respect to the second half, we continue to project sub-2% growth, a view that we have held for some time.