We just got our second estimate for Q2 and the results were slightly better then expected. The economy grew 3.3% in Q2, up from 3.0% growth in the first estimate. Which is slightly above the historical average of 3.2%.
The economy continues to a grow at a roughly 2% annual pace. Which isn’t bad, but it isn’t anything to get too excited about either.
was revised up slightly, but still pretty weak overall. Imports continue to be the biggest driver of growth, which isn’t anything that is sustainable. With business investments being the main contributer to the upward revision to GDP (the initial estimate was +0.27%, which was revised up to +0.78% in the latest estimate).
Real consumer spending (roughly 70% of the economy) remains weak. It’s the second straight quarter of below average growth, as consumers grapple with poor sentiment around the future of inflation and recent labor market weakness.
This has only happened once since the 2020 COVID pandemic.
Is this just a reversion to the mean or a new trend? If we look at the year over year growth rate in consumer spending, it certainly gives the impression that recent weakness is nothing more than a reversion back to a more normal pace of growth. As the annual growth rate of 2.4% (orange) remains around the historical average of 2.31% (blue).
Economy wide corporate profits increased $65 billion in Q2 (+1.7%), but still down from the Q4 2024 record highs. It goes to show that the stock market isn’t the economy, as S&P 500 profits are growing at a 10% pace so far this year, thanks to AI driven spending.
Speaking of AI related spending, reported results last night. And while they beat on both sales and EPS, the beat rate for both was the lowest since the boom began and the first time that the sales and EPS beat rate came in below the S&P 500 average.
The economy is slowing, but so far it appears to be slowing back to the historical average. Downside (recession) risk has picked up a little bit, but nothing alarming thus far. Corporate credit spreads (high yield and investment grade charts above) both remain well below their historical averages, signaling confidence from investors that companies will be able to deliver on their profit forecasts.