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Why consumption is encouraging though overall Q2 growth rebounds

Brent Nyitray, CFA, MBA

Increases in gross domestic product, or GDP, measure economic growth

Gross domestic product is what’s referred to generally as “the economy.” It’s the sum of consumption, investment, and government spending. Another way to think of GDP is the output of goods and services produced by labor and property in the U.S. economy. This number is an estimate of growth. The U.S. economy is roughly $16 trillion.

The Bureau of Economic Analysis puts out three estimates of GDP growth after a quarter ends. The advance estimate is released within a month of quarter end, and it’s based on incomplete data or data subject to revision. The second is released after two months, and the third and final revision is released after three months.

Highlights of the Q2 release

The advance estimate to Q2 GDP showed GDP grew at an annualized pace of 4%. The advance estimate is often revised. Consider that the advance estimate for the first quarter was a +0.1% increase, which was revised down to -1% and then finally settled at -2.9%. Finally, it was revised to -2.1% as the government made some adjustments to the baselines.

The price index increased at 1.9% annually. This is still below the rate the Fed would like to see.

Personal consumption expenditures were strong, at 2.5%.

First quarter consumption was low, so it appears purchases were pushed into the second quarter. Regardless, it’s encouraging to see stronger consumption.

Investment ticked up as well, as construction activity picks up and businesses begin to make capital expenditures.

Implications for homebuilders

Overall increases in business activity and consumption are starting to drive more business for homebuilders, like Lennar (LEN), Pulte Group (PHM), Toll Brothers (TOL), and D.R. Horton (DHI). Housing starts have been so low for so long that there’s some real pent-up demand that will unleash as the economy improves. The secular (long-term) story for homebuilders is optimistic. Household formation numbers will be a real wind at their backs.

Investors who are interested in trading the builders as a sector should look at the S&P SPDR Homebuilder ETF (XHB).

Homebuilding can become a virtuous circle for the economy, and this explains why the recovery has been tepid so far. Historically, homebuilders were the first to recover after a recession. Construction and homebuilding usually led the economy out. This time around, that didn’t happen because of the shadow inventory, which meant that economic growth was more tepid during this recovery. But that appears to be changing.

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