US GDP growth proves economy 'still robust' in Q2: Economist

The US economy grew faster than expected in the second quarter as GDP (gross domestic product) increased at a 2.8% annual pace. BlackRock global chief Investment Strategist Wei Li and EY chief economist Greg Daco join Catalysts to break down the state of the economy and what this economic expansion means for potential interest rate cuts from the Federal Reserve.

"There was not a major slowdown in terms of economic activity. We still had consumers spending, although they were exercising a little bit more discretion in a high-priced, high-interest-rate environment. We still had businesses investing, especially in high growth areas and growth areas that also drive stronger productivity momentum. So those were the good signs in this GDP report," Daco says of the print.

He explains that there are signs of a labor market cooldown, which in turn slows disposable income growth and ultimately causes consumers to be more cautious about their spending. He believes that July would have been an opportune time for an interest rate cut as the US saw "disinflation working its way through the economy."

Li notes that information-processing-equipment spend in this GDP print grew as the AI race continues to play out. She believes there is more room for the AI trend to grow, however, she would caution investors away from an "automatic buy-the-dip strategy." She believes that second quarter earnings will be critical, and in the long term, "fundamentals will prevail."

For more expert insight and the latest market action, click here to watch this full episode of Catalysts.

This post was written by Melanie Riehl

Video Transcript

The US economy growing faster than expected GDP increasing at a 2.8% annual pace with consumer spending helping propel some of that growth.

So what is the signal for the feds path forward for rate cuts?

We want to talk about that and also what this ultimately means for the equity market for that we want to bring in way the black rocks, Global Chief Investment strategist, we also have Greg Daco Ey, chief economist.

Great to see both of you, Greg.

Let me go to you because I think that this is more of an econ question.

At least here at the top.

We're trying to figure out how resilient the economy is up until this point.

Ultimately, what the stronger than expected print means for the feds path forward?

Does this ultimately take July off the table?

I think July was largely off the table before this print.

Uh But what this report shows is an economy that was still robust in the second quarter.

Uh There was not a major slowdown in terms of economic activity, we still had consumers spending although they were exercising a little bit more discretion in a high price high interest rate environment.

We still had businesses investing especially in high growth areas and growth areas that also drive stronger productivity uh momentum.

So those were the good signs in this GD report.

One thing that I will note is that we are seeing in the more recent data as we pass the Midyear point, we are seeing some signs of a labor market cool down, not a retrenchment but a slowdown which is in turn feeding into slower real disposable income growth and will likely lead to even more caution when it comes to consumer spending.

So the economy is gently cooling but still retains that robust pace uh which is quite encouraging from a broad perspective in terms of economic activity way, I want to bring you into the conversation because there are some signs of a soft landing depending on where you look within the data.

Do you think that is going to be enough for markets to reverse course from the significant stumble that we saw over the past 24 hours here?

I think what really jumped to me uh jumped out to me from the GDP print is the jump in the information processing equipment, high tech equipment spend that boosted the GDP print.

It really goes to show that A I spend is now boosting growth previously.

It was more of a yes, we think that's going to happen.

This is showing that that is happening.

We do think that there is more legs, more runway for the A I investment theme to play out.

But obviously in the context of thinner liquidity during summer, uh corporate buyback blackout, a stronger yen that has been a popular um well weaker yen had been a popular funding leg for global carry trades and a stronger yen could unwind some of that.

When you bring all the technical factors together, we see a bit of a stumble especially given how well this theme has done.

But in a broader context, from a fundamental perspective, we think that there is more to go and today's GDP print is a sign of that happening on a broader basis.

So wait, what does that mean for investors?

Should they then be viewing this as a buying opportunity?

Well, I I would caution against automatic by the deep type of strategy.

Obviously, we need to see where earnings are coming through.

You know, you look at small cut, for example, that has been holding up better on a relative basis.

But when we look at their earnings, you know, 40% of Russell 2000, uh haven't actually delivered positive earnings looking back the 12 month.

So we do need to see earnings come coming through in this current earnings season and to the extent the markets dislocate from fundamental convictions, we do want to lean in and you know, it market going to go up tomorrow.

We don't know, but over a longer term horizon, we do think the fundamentals will prevail.

And specifically, specifically when it comes to athletes, we look at kind of tech, um industrial energy, health care.

These are the sectors that are seeing earnings upgrades and we expect them to carry that a lot of the earning season strength.

Well, Greg, I want to go to you on the thesis we can drive from the earnings we've been getting in so far, taking a look at the weakness that we've seen, for example, in luxury and autos.

Of course, in airlines, is that a plot that the Federal Reserve needs to be paying attention to or just something like the GDP number that we got in today, poor cold water all over the potential weakness we're seeing in earnings.

Well, I think generally speaking, we have an environment where consumers are suggesting that prudence is better uh relative to exuberance and they are being more discreet in their purchases, especially of high priced items.

But you have two consumers really out there.

You have a consumer that is more highly uh debt burdened.

One that is looking at weaker income growth that is being more careful with their outlays and then you have higher income dead burden consumers that are still spending relatively freely overall though.

What is happening is that you're still seeing this disinflationary momentum.

We continue to see this inflation working its way through the economy and that should allow the fed to start recalibrating monetary policy as I said on the show before, I think July and perhaps even June would have been a good time to start recalibrating monetary policy and do so gradually.

There's no need to bring rates down to zero because the economy is still robust.

But you are seeing an environment where there are some initial signs of a cool down in economic activity.

It's gentle but it's disinflationary, which is exactly what the FED wants to do.

And therefore now is the optimal time to start recalibrating monetary policy.

So I expect next week, fed policymakers will likely open the door with September rate cut.

Um and potentially even a December rate cut after that.

All right, we're going to have to leave it there.

Thank you both so much for joining us.

That was way le Blackrock, Global Chief Investment strategist.

We had Greg do.

He is over at EY as their chief economist.