Well, real GDP finally hit a 4 percent growth rate in the second quarter; so, naturally, the Dow ended the day down. This is why I don’t claim to be a forecaster, and, when I’m forced into it, I try to update it often.
While I could quibble—for instance, inventory accumulation accounted for 1.66 percentage points of the increase after subtracting more than 1 percentage point from the first quarter number—the increase was fairly broadly based. In addition to inventory investment, the number benefited from consumption spending, both residential and nonresidential investment, exports, and both state and local government spending. You may not consider the latter a good thing even though it pushes GDP in the desired direction. The only major negative category was an increase in imports, which is not a bad thing, but is a negative in the arithmetic.
The plus 4 percent growth rate for the second quarter came after a minus 2.1 percent in the first quarter, which was revised up in the annual revisions from the minus 2.9 percent estimated a month ago. Revisions were made back three years and trimmed growth slightly in 2011 and 2012.
Nominal GDP, or current dollar GDP, which I like to think of as the percentage growth in the M2 money supply plus the percentage growth in the velocity of M2, showed an even larger acceleration from the first to the second quarter. The second quarter growth rate of nominal GDP was 6 percent, up from only 0.8 percent in the first quarter. Six percent was about the same as the growth in M2 during that time, suggesting that the recent declines in the velocity of money eased up. In other words, the existing turnover of the money supply speeded up.
On the right side of the equation of exchange, GDP prices increased at an annual rate of 1.9 percent in the second quarter, which added to the 4 percent real growth rate gets you to the nominal GDP increase of 6 percent with a little rounding. The 1.9 percent GDP price inflation is half a percent greater than the increase of 1.4 percent in the first quarter. We are getting closer to the FOMC’s desired inflation rate of 2 percent, although their preferred inflation gage is the PCE deflator, which remains a tad below that.