Output has now surpassed the previous high set in Q2 2019

By Manuel Gutierrez, Consulting Economist to NKBA

Key Takeaways:

• The total of $19.4 trillion beats the previous high by $155 billion.
• Consumption, its largest component, is up by 11.8%, with Housing the #1 sub-group.
• The investment component, including residential real estate, is down, reflecting a slowdown in pace.

It has taken a year-and-a-half for the nation’s output to reach, and now actually exceed, pre-pandemic levels. Gross Domestic Product (GDP) rose 6.5% in the second quarter, slightly greater than the 6.3% first-quarter growth, to $19.4 trillion (Figure 1). This is $155 billion higher than the previous high of $19.2 trillion achieved in the second quarter of 2019.

Of course, returning to those levels does not compensate for the hundreds of billions in output lost over the last 18 months.

Three of the five major components of GDP increased during the second quarter (Figure 2). Consumption spending, which makes up the bulk of GDP as it is currently measured, rose by 11.8%, also slightly above the first-quarter growth of 11.4%. Total consumption was $13.7 trillion in the second quarter, over 70% of all GDP output, and $410 billion higher than its level in the fourth quarter of 2019.

The other two GDP components also rising were in the realm of foreign trade. U.S. exports increased by 6% to $2.3 trillion in the second quarter, which is a welcome gain. However, imports from other countries rose by a faster 7.8%, totaling $3.55 trillion, which worsened the U.S. foreign trade deficit.

The difference between the two is $1.26 trillion, a negative number for GDP, which is the amount of money that the U.S. adds to its debt to foreign countries. Those countries either accept U.S. dollars or acquire U.S. assets or debt, such as U.S. Government Treasury Bills.

Figure 2 also shows two components that declined in the second quarter. Investment — which is of particular interest to the housing sector — fell by 3.5%, and Government Expenditures, which was off 1.5%. They have a different impact on the economy, although for GDP accounting purposes, they are assumed to have a similar effect. That is, an increase in spending in either one increases GDP, and a decrease in either has the opposite effect.

Government spending is the result of taking resources from the productive private sector and using them for government purposes. It doesn’t add value to the economy, but instead simply reallocates funds.

Investment, on the other hand, does add to the economy because businesses and consumers are using their own funds and spending them on goods, such as new buildings or machinery.

Figure 3 breaks down total investment into several major types. Although the 3.5% drop in Total Investment is a negative for the GDP, viewing individual components provides a different perspective.

The decline in overall investment is driven by two components related to real estate. One, Structures, reflects businesses investment in either new buildings or renovation of existing ones.

Other data, which includes the value of construction added each month by building type, reveals that spending for most types of buildings has been declining for almost two years.

For instance, construction of hotels, office and educational buildings has been falling steadily since at least the end of 2019.

The second investment type that’s falling (shown in Figure 3) is Residential investment. Similar to businesses, households invest both in building new homes and renovating or maintaining existing houses. The decline in residential investment in the second quarter reflects the slower pace of housing construction and remodeling over the second quarter compared with the first quarter.

Finally, given that Consumption spending is the largest category making up GDP, it’s interesting to see how consumers are spreading their funds across types of products. Figure 4 shows the major categories of goods and services that account for the bulk of the $13.7 trillion in consumer spending.

Here, Housing leads the way at $2.76 trillion, or 18% of the total in the second quarter. Housing includes all costs related to buying, renting or maintaining homes. Note that there is a separate category near the bottom of Figure 4 for Home Furnishings, which includes items such as carpeting or window coverings.

Besides Housing, the other top category is Health Care, which captures 16% of spending. Together, those top two categories account for more than one-third of all spending.

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