The first estimate on second quarter GDP was a big disappointment.
The economy grew at just a 1.2% annualized rate for the three months ended June 30, less than the 2.5% expected by economists.
But underneath the bad headline we got the real story of what’s going on in the economy right now, and the story is pretty simple: consumers are winning.
Personal consumption rose 4.2% in the second quarter of the year, the best reading since the fourth quarter of 2014 and near the best level we’ve seen since before the financial crisis.
The big drag on Friday’s number was the business side of the economy, where nonresidential fixed investment fell 2.3%. This, however, was countered by R&D spending, which rose 4.8%.
Neil Dutta, an economist at Renaissance Macro, noted that R&D spending totaled 1.8% of GDP in Q2, which was a record. This bodes well for future productivity, in Dutta’s view.
Another theme that we argued earlier this year would eventually play out — inventory liquidation — also appears to be proceeding apace.
The simple read here is that people bought lots of stuff businesses had already purchased. This means that 1) consumers are still very clearly willing to spend money and 2) lots of this stuff was likely purchased at a discount.
What’s good for consumers is often not great for business.
Elsewhere in economic data on Friday the latest employment cost index showed wages also continue to rise for US consumers.
The employment cost index — a more comprehensive measure of compensation including both wages and other benefits paid to employees — rose 2.3% over the 12 months ended June 30. Wages, which comprise 70% of this index, were up 2.5%.
The overriding economic theme right now is that a generational shift in capital from employers to employees, and data out Friday showed this shift as clearly as anything we’ve seen.