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Q2 2021 U.S. GDP Worse-Than-Expected

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Another eventful morning in economic data brings us both the latest results in weekly jobless claims and the first look at a new quarter of Gross Domestic Product (GDP). Both headline figures look worse on initial impact than they do when one looks a little closer at the data. Here’s what we mean:

The first read on Q2 GDP came in at +6.5% — roughly 200 basis points below consensus expectations. It follows the last Q1 GDP headline number of +6.4%, implying only a slight tick-up in growth quarter over quarter. With Q2 expected to have been the first full quarter of growth during the Great Reopening — as well as the first representing the early summer, when consumption tends to go up — a 10-basis-point hike looks like a big disappointment.

However, when we take a look at Inventories, which are down for the second-straight quarter, we see there is much re-stocking to do. This is consistent with the dearth in the chips market we’ve been reporting on (which has led to underproduction in goods that use lots of microchips, like new autos), as well as shortages in supply for things like lumber in new home building. In short, these are economic weaknesses of which we’d already become aware.

Also, when we happen to have a stronger-than-expected quarter of GDP growth, but that growth is tied up mostly in high Inventory numbers, this is seen as a relative negative. Why? Because if that inventory is not drawn down via sales in future quarters, it just stays there. It doesn’t add to future economic growth, due to oversupply. Thus, with the opposite “problem” before us, low Inventories keeping overall GDP down can be seen as a very good excuse for a bad headline.

Consumption, on the other hand, was smoking-hot in Q2: +11.8%. So as we saw in pandemic-high Consumer Confidence metrics of late, customer spending looks to have more than pulled its weight. The GDP Price Index of +6.0% is 50 basis points higher than analysts had been expecting, with core PCE (which the Fed takes heavily into account when making monetary policy) at +6.1%. In Q1, core PCE was +2.7%.

Also, Initial Jobless Claims hit 400K exactly for last week, again higher than expectations for closer to 380K. However, it’s still down from the upwardly revised 424K reported the previous week, though it’s now the second week at a “4-handle” after three weeks below it. The week before July 4th and the week after both brought in pandemic-low reads of 368K. We are now averaging 395K new jobless claims every week over the past 10.

Continuing Claims, reporting a week in arrears from Initial Claims, also went the wrong direction from the previous week: 3.27 million is up from the upwardly revised 3.26 million reported prior, which now represents the new pandemic low on longer-term jobless claims. It has now been a couple weeks since a couple dozen states removed their pandemic era unemployment support, and it appears it’s taking a few weeks for this to bring more Americans to the workforce.

After the market opens today, we look for a new read on the Pending Home Sales Index for June. Again, based on supply constraints and subsequent higher pricing, analyst expect a big drop-off to +0.5% from +8.0% on a monthly basis in May. The May figure year over year was 13.1%, which followed the all-time record high recorded for pending home sales in April, +51.7%. Such high demand leading to dwindling inventories is still something our economy must work through.

Meanwhile, trading-app pioneers Robinhood will start trading on the Nasdaq early this afternoon in its IPO today. Priced at the low end of its range, $38 per share, the company reports a $2.1 billion offering size and a $32 billion valuation. Robinhood, which will trade under the symbol HOOD, said it is allocating up to 35% of its offering to customers of the app, or nearly 1% of assets under custody.