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Real gross domestic product (GDP), a measure of the market value of goods and services produced within a calendar year, grew at an annual rate of 6.7% in Q2. That’s slightly ahead of the early estimates of 6.6% released in August, and higher than the 6.3% growth reported in the previous quarter.
The upward revisions in Q2 GDP reflect several factors, like an increase in Personal Consumption Expenditures (PCE), driven by higher spending in services (led by food services and accommodations) and goods (led by “other” nondurable goods, such as pharmaceutical products, and clothing and footwear). PCE is the most significant component of GDP, and therefore, has the most considerable weight on GDP growth.
There was also an increase in nonresidential fixed investment, driven by higher spending in equipment (led by transportation equipment), and intellectual property products (led by software and research and development).
Lastly, there was an increase in exports, driven by higher spending on goods (led by nonautomotive capital goods) and in services (led by travel).
Meanwhile, two gauges of inflation included in the BEA report indicate that the old villain of the American economy remains elevated. The GDP Deflator, a metric used to adjust GDP for price changes, rose 6.2% from the previous quarter, according to expectations.
PCE Prices, a measure of inflation closely followed by the Fed, rose at a quarterly rate of 6.5%, again in line with expectations.
What Does BEA Report Mean for Wall Street?
For debt markets, a more robust economy and elevated inflation is a headwind. They may force the Federal Reserve to speed up tapering and eventually raise short-term interest rates, driving bond prices lower and yields higher.
In addition, higher yields are a tailwind for the dollar, as foreign capital will flow into the U.S. to take advantage of the higher yields.
The higher bond yields are a headwind for equities. They reduce the future value of corporate earnings (bond yields are used as a discounted factor in conventional valuation models).
The good news is that the more robust GDP data is a tailwind on corporate profits. For example, a higher PCE is good news for listed companies that sell consumer goods. Likewise, higher fixed investment is good news for companies that sell capital goods.
While it’s unclear whether the tailwinds will prevail over the headwinds and push equities higher soon, one thing is clear: the fear of missing out (FOMO) and the fear of losing out (FOLO), will drive volatility on Wall Street.
Disclosure: At the time of publication, Panos Mourdoukoutas had no positions in the stocks mentioned.
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