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Economy Statement for the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association

(Archived Content)

The U.S economy accelerated in the second quarter of 2017, recouping momentum temporarily lost in the first quarter.  Real GDP growth picked up to an annual rate of 2.6 percent, more than double the 1.2 percent rate seen in the first quarter of the year.  Personal consumption expenditures, generally the most significant driver of overall economic activity, stepped up noticeably in the second quarter and non-residential fixed investment continued to expand.  Although residential investment declined after the previous quarter’s double-digit advance, net exports made another positive, if small, contribution to growth, and inventory accumulation had a neutral impact.  Total government spending grew in the second quarter, as a strong increase in federal outlays more than offset a small decline in state and local spending.  Labor market conditions remained healthy, as the monthly pace of payroll employment accelerated in the latest quarter and the labor force participation rate trended higher.  In June 2017, the unemployment rate stood at 4.4 percent, just above the sixteen-year low reached in May and well below the pre-recession norm of 5.3 percent.  Economic fundamentals remain solid and suggest growth will continue at a steady pace through the remainder of this year. 
GDP Growth
According to the advance estimate of real GDP growth, which was released last Friday, the U.S. economy grew at an annual rate of 2.6 percent in the second quarter after rising at an annual rate of 1.2 percent in the first quarter.  Real personal consumption expenditures accelerated to an annual rate of 2.8 percent in the second quarter, up from 1.9 percent in the previous quarter.  Consumer spending added 1.9 percentage points to growth in the second quarter, the largest contribution of any component.  Private domestic final purchases – the sum of personal consumption, business fixed investment, and residential investment – grew in the second quarter at an annual rate of 2.7 percent.  This measure, which excludes government spending, exports, imports, and inventories, better portrays the strength of underlying private demand in the economy.
Business fixed investment grew 5.2 percent at an annual rate in the second quarter, moderating from the 7.1 percent advance in the first quarter.  One subcomponent accelerated, with the pace of equipment investment nearly doubling to reach an annual rate of 8.2 percent, up from 4.4 percent in the previous quarter.  The other two components expanded but at a slower pace than in the first quarter. Outlays for intellectual property products grew at annual rate of 1.4 percent, compared with 5.8 percent in the first quarter.  Spending on structures rose 4.9 percent at an annual rate, after a 14.8 percent surge in the first quarter that was driven largely by energy-sector spending.  
In the second quarter, inventory adjustment made an essentially neutral contribution to growth, after subtracting 1.5 percentage points in the first quarter. The change in private inventories has weighed on real GDP growth in six of the last eight quarters. The extended softness suggests the need for a re-building of inventories in coming months.
After two consecutive quarters of strong growth, residential investment declined at an annual rate of 6.8 percent in the second quarter, compared with jumps of 11.1 percent in the first quarter and 7.1 percent in the fourth quarter.  House price appreciation has accelerated in recent months, reflecting low inventories and a small pull-back in mortgage rates.  Although housing demand flagged in the second quarter, especially for existing homes, and homebuilder sentiment has receded somewhat, housing starts and building permits both surged in June, and builders’ overall outlook remains positive, suggesting a pick-up in residential construction in coming months.  
Government spending provided a modicum of support for growth in the second quarter, after posing a small drag in the previous quarter.  Federal outlays grew 2.3 percent in the latest quarter, after declining by roughly that much in the first quarter.  State and local government outlays fell by 0.2 percent in the second quarter, after a 0.5 percent advance in the previous quarter.  Total government spending in the second quarter was 0.7 percent higher, after a decline of 0.6 percent in the first quarter. Overall, government spending has mostly moved sideways since early 2016.
Net exports made a modest contribution of 0.2 percentage point to second-quarter growth, matching its first-quarter addition.  Compositionally, exports grew more slowly in the second quarter, rising 4.1 percent, while import growth slowed to 2.1 percent.  This resulted in a narrowing of the trade deficit in the latest quarter.
GDP Revisions
An annual revision of historical data going back to 2014 accompanied last week’s advance second quarter GDP report.  These revisions reflected the incorporation of newly available and revised source data as well as improvements to existing methodologies.  For the period from 2013Q4 to 2016Q4, average real GDP growth was revised up by 0.1 percentage point to 2.2 percent, reflecting upward revisions to consumption and gross private investment, which offset a small downward revision to government spending.  The bulk of the revision occurred in 2014, with real GDP growth over the four quarters of that year marked up from 2.5 percent to 2.7 percent.  Growth during 2015 was revised up 0.1 percentage point to 2.0 percent, while the increase in real GDP over the four quarters of 2016 was revised down 0.2 percentage point to 1.8 percent.  Growth in the first quarter of 2017 was revised down by 0.2 percentage point to 1.2 percent.
Labor Markets and Wages
During the second quarter of 2017, monthly job growth averaged 194,000, stepping up from the first quarter’s monthly average of 166,000 and rising above the monthly pace of 187,000 seen in 2016.  The unemployment rate stood at 4.4 percent in June, just above the sixteen-year low reached in May; the current rate is less than half its 2009 peak of 10 percent and well below the 2002-2007 average of 5.3 percent.  Headline unemployment remains at a level that is historically consistent with full employment, and sustained improvement in broader measures of unemployment suggest a continued decline in labor market slack.  Levels of initial claims for unemployment insurance remain near 40-year lows.  Continuing claims have risen moderately after reaching a 28-year low in early May, but remain near historically low levels.  Tightening labor market conditions have led more workers to enter the labor force, helping to offset demographic trends: the labor force participation rate rose to 62.8 percent in June, just under the twelve-month high reached in March.  The July employment report will be released this coming Friday. 
Growth in nominal wages and compensation has held steady, although higher inflation relative to a year ago has eroded nominal wage growth in real terms.  Nominal average hourly earnings for private-sector production and nonsupervisory employees rose 2.3 percent over the year ending in June 2017, a few ticks below the average for 2016 but still in line with the pace between 2013 and 2015.  Real average hourly earnings grew 0.9 percent over the twelve months through June, one-half the rate of 1.8 percent seen a year earlier.  The Employment Cost Index for wages, salaries, and benefits in private industry has stabilized in recent quarters; in the year through June 2017, total compensation grew 2.4 percent, matching its rate from a year earlier.  Private wages and salaries grew 2.4 percent over the past twelve months, slowing from the 2.6 percent pace in the year through June 2016.  Private benefits growth accelerated notably, however, rising 2.2 percent in the year through June 2017, well up from a 1.7 percent pace over the previous year.
The recent pull-back in oil prices has contributed to a slowing of inflation in recent months.  The Consumer Price Index (CPI) for all items increased 1.6 percent over the year ending in June, down noticeably from the 2.7 percent rate seen in February 2017 but still up from the 1.0 percent rate of a year earlier.  Over the year ending in June 2017, energy prices were up 2.3 percent and gasoline prices fell 0.4 percent.  Over the same period, rates of food price inflation have accelerated, with the food price index up 0.9 percent.  Excluding food and energy, the CPI was 1.7 percent higher over the year ending in June 2017, which is 0.5 percentage points below the 2.2 percent rate over the year ending in June 2016.
The Personal Consumption Expenditures (PCE) price index showed headline and core consumer inflation decelerating in recent months.  The headline PCE rose 1.6 percent over the most recent four quarters, up from the 1.0 percent pace observed a year earlier but down from the 2.0 percent pace in the first quarter.  Core PCE prices rose 1.5 percent over the most recent four quarters, slowing from the 1.7 percent pace of a year earlier and down from 1.8 percent in the first quarter.
The rate of real GDP growth accelerated in the second quarter of 2017 to 2.6 percent, propelled by a strong recovery in consumer spending.  Solid macroeconomic fundamentals are expected to drive steady growth over the rest of the year.  The headline unemployment rate remains just above a sixteen-year low, providing support for household consumption and a pick-up in wage growth in the coming months.  Although measures of consumer and business confidence have retreated a bit, they remain near the multi-year highs reached a few months ago.  Private forecasters are currently projecting a growth rate of 2.2 percent for 2017 as a whole.