Summary: US GDP up 1.6% (6.5% annualised) in June quarter, less than 2.0% expected; indicates lagged consumption boom; economy expansion at “extraordinary pace”; cashed-up consumer “spending big”, downward surprise from inventories expected to reverse “over coming quarters”; GDP price deflator annual rate doubles from 2% to 4%.
US GDP growth slowed in the second quarter of 2019 before stabilising at about 0.5% per quarter. At the same time, US bond yields suggested future growth rates would be below trend. The US Fed agreed and it reduced its federal funds range three times in the second half of 2019. Pandemic restrictions in the June quarter of 2020 sent parts of the US economy into hibernation; the lifting of those same restrictions sparked a rapid recovery.
The US Bureau of Economic Analysis has now released June quarter “advance” GDP estimates and they indicate the US economy expanded by 1.6% or at an annualised growth rate of 6.5%. The figure was less than the +2.0% (+8.3% annualised) which had been generally expected but slightly higher than the March quarter’s 1.5% expansion after revisions.
Westpac economist Lochlan Halloway said, “Overall, the report indicates a lagged consumption boom following two rounds of fiscal stimulus during Q1 as well as vaccine distributions.”
US Treasury bond yields moved a little higher on the day. By the end of it, the 2-year Treasury bond yield had crept up 1bp to 0.21% while 10-year and 30-year yields each finished 2bps higher at 1.26% and 1.91% respectively.
In terms of US Fed policy, expectations of any change in the federal funds rate over the next 12 months remained largely stable. Federal funds futures contracts for July 2022 implied an effective federal funds rate of 0.12%, 2bps above the current spot rate.