Today’s advanced report of second quarter GDP came in close to expectations, with growth decelerating to a 2.4 percent annualized rate in the second quarter, which is a slowdown from 3.7 percent growth in the first quarter and 5 percent growth in the fourth quarter of last year. While today’s report is the first estimate of overall economic growth in the second quarter and will be revised as additional data arrive, it appears that the recovery is slowing — concerning news to manufacturers.
One sector important to manufacturing is residential investment and housing. Temporarily spurred by the end of the homebuyer tax credit, this sector rose at an annual rate of 28 percent, accounting for a quarter of overall economic growth in the second quarter. Since this temporary measure likely brought forward activity that would have taken place later in the year, housing activity will likely be a drag on growth in the third quarter. Manufacturers produce the majority of the products used in home construction; as the housing the housing market slows down from the temporary growth in the second quarter manufacturers will likely see demand for housing related products slow as well.
Manufacturers could find some good news in today’s report. First was that exports, most of which are manufactured products, rose by 10.3 percent in the second quarter. This represents the fourth consecutive quarter of double-digit export growth, a feat that has not been accomplished in more than two decades! Exports are leading the way in this recovery and are one of the main reasons why manufacturing has been outpacing the overall economy over the past year.
The other good news in today’s report was that business investment rose a solid 17 percent in the second quarter, mainly driven by increases in equipment and software which rose at an annual rate of 22 percent. The increase is an important sign that while a slowdown may continue during the next several quarters, businesses are making some capital purchases, many of which are produced by U.S. manufacturers. It is important to note that some of these purchases of business equipment were likely due to pent-up demand that was put on the backburner during the recession. With that demand now met, I would expect a slowdown in business investment to take place in coming quarters.