What Q2 2024 US GDP Says About Sentiment

Q2 US gross domestic product (GDP, a government-tabulated economic output measure) hit the wires Thursday, and commentators we follow seemed ... oddly happy.

They noted the acceleration from 1.4% annualised growth in Q1 to 2.8% and cheered the US economy’s resilience in light of higher interest rates.^[i] Soft landing chatter started giving way to more vibrant adjectives. Some coverage we saw started looking to 2025 with high hopes, speculating about a pending boom as public investments start paying off.

We think the sentiment uplift is encouraging, and it matches what we have observed elsewhere this year. Budding optimism can be a fine thing for stocks, according to our research, and we still see some scepticism—this isn’t the euphoria we have found typically accompanies stock market peaks, in our view. But we also see hints of what misplaced optimism may eventually look like in the GDP coverage this week, and we think investors would do well to take note.

To be clear: This was a good report, in our view. Not only did GDP accelerate, but the private-sector components we find are most relevant for stocks shone brightly. Business investment accelerated from 4.4% annualised to 5.2% as corporations went on offence.^[ii] Investment in equipment, which suffered as businesses spent two years cutting back in anticipation of a US recession that never arrived, surged 11.6% annualised.^[iii] Investment in intellectual property products (software, research & development, etc.), which has been driving much of recent quarters’ growth, slowed but still grew a respectable 4.5% annualised.^[iv]

Spending on commercial structures cooled off after a banner stretch, falling -3.3% annualised, but this looks more to us like a redeployment of resources than overall nerves.^[v] Also supporting the return to offence, in our view, the inventory drawdown flipped to a boost, adding 0.8 percentage point to headline growth.^[vi] That contribution is, as we think inventories always are, open to interpretation. But after several quarters’ falling contributions, this looks to us like restocking rather than a burgeoning glut.

We have theorised for a while that after two years of trimming excess and building balance sheets, corporate America was ready to turn up the dial. We saw it in corporate capital expenditure (capex) plans, corporations’ big cash buffers, S&P 500 companies’ collective return to earnings growth and improved guidance for both earnings and revenues.^[vii] We thought companies had the will and the firepower, and now it seems we are seeing more fruit. In our view, stocks have seen this coming, and we think this year’s rally has, in part, pre-priced it.^[viii] But we suspect there is more to come.

At the same time, we think it is important to be measured. So, let us talk about consumer spending, which inspired a lot of cheer amongst commentators we follow. It accelerated from 1.5% annualised in Q1 to 2.3%.^[ix] Headlines we follow cheered the dual growth in goods and services, heralding consumers’ strength and the rising wages that underpin it.^[x] Which, sure, totally. That is correct, in our view. But there may be a bit of a base effect here as well. The US Bureau of Economic Analysis (BEA) has long struggled with seasonal adjustments to Q1 data, with lockdowns and reopening compounding the problem. The seasonally adjusted results, it seemed, didn’t quite scrub away the normal post-holiday hangover.^[xi] That isn’t the only reason consumer spending on goods fell -2.3% annualised in Q1—the auto industry’s ongoing supply struggles played a role there—but it probably contributed, setting a lower baseline for Q2 and enabling a shinier result.^[xii]

We aren’t trying to talk things down or say spending was bad, weak, or, or or. In our view, it was good! We simply note: A discussion of the base effect was absent from the broader news coverage we read. In a more pessimistic or sceptical environment, commentators we follow would usually mention every potential cloud in the proverbial silver lining. Now, they seem much more eager to brush past caveats. Again, we think this is the tiniest of caveats. But omitting mention of them is the sort of thing we think investors could see a whole lot more, in glaring and increasingly illogical ways, when sentiment does reach euphoria eventually. Therefore, we think it is important to train your eyes and mind to spot it now, well before that happens, so that you are equipped.

In the meantime, whilst sentiment is a lot warmer, we think there is still enough scepticism to preserve a bullish gap between expectations and reality. Whilst commentators we follow do seem to have backed off warnings of interest rate trouble for today at least, they cited other reasons to preach tempered expectations. The common thread seemed to be a focus on the US labour market. We have seen several articles warning only solid employment is enabling consumer spending and noting the uptick in weekly jobless claims lately.^[xiii] If redundancies continue and escalate, they warn, it will sap consumer demand and threaten the broader expansion.^[xiv]

In our view, this gets things backward on a few fronts. Our research finds consumer spending is pretty stable even at times of high unemployment, since most of it goes to essential goods and services rather than luxuries and nice-to-haves. Hence why business investment, not spending, tends to be the economic swing factor, based on our research. Additionally, economic growth generally creates jobs, not the other way around, with rising unemployment following economic contraction at a lag.^[xv] To us, this is misplaced scepticism, making it easier for reality to keep delivering positive surprise.