The Economy is Red Hot. Is It Really?

On today’s show we are unpacking the shocking GDP announcement that was published at 8:30 on Wednesday morning July 30. The market expected a 2.3% growth rate and the actual published number blew past the expectation with a 3% annualized growth rate in the second quarter. This is in stark contrast to the negative 0.5% growth rate in the first quarter.

So the obvious question is how did the economy swing from economic contraction in the first quarter to 3% growth in the second quarter?

On today’s show we are going to look at the underlying components of the GDP calculation to get an understand what is happening.

There are only a handful of variables, five of them in fact that move the needle. There is consumption, investment, inventory, imports and exports.

Let’s look at each one of these factors and determine the impact of each one on the GDP calculation.

------------

**Real Estate Espresso Podcast:**
 Spotify: [The Real Estate Espresso Podcast](https://open.spotify.com/show/3GvtwRmTq4r3es8cbw8jW0?si=c75ea506a6694ef1)  
 iTunes: [The Real Estate Espresso Podcast](https://podcasts.apple.com/ca/podcast/the-real-estate-espresso-podcast/id1340482613)  
 Website: [www.victorjm.com](http://www.victorjm.com)  
 LinkedIn: [Victor Menasce](http://www.linkedin.com/in/vmenasce)  
 YouTube: [The Real Estate Espresso Podcast](http://www.youtube.com/@victorjmenasce6734)  
 Facebook: [www.facebook.com/realestateespresso](http://www.facebook.com/realestateespresso)  
 Email: [[e-mail]](mailto:[e-mail])  
**Y Street Capital:**
 Website: [www.ystreetcapital.com](http://www.ystreetcapital.com)  
 Facebook: [www.facebook.com/YStreetCapital](https://www.facebook.com/YStreetCapital)  
 Instagram: [@ystreetcapital](http://www.instagram.com/ystreetcapital)  

Episode Transcript

(00:01):
Welcome to the Real Estate Espresso podcast, your morning
shot of what's new in the world of real estate investing.
I'm your host, Victor Minash. On today's show, we're unpacking
the shocking GDP announcement that was published at 8:30
Wednesday morning, July 30th. The market expected a 2.3%
growth rate and the actual published number blew past that
expectation with a 3% annualizedgrowth rate in the second

(00:24):
quarter. This is in stark contrast to the
-0.5% growth rate in the first quarter.
So the obvious question is how did the economy swing from
economic contraction in the first quarter to 3% growth in
the second quarter? Well, on today's show, we're
going to look at the underlying components of the GDP
calculation to get an understanding of what's

(00:44):
happening. There's only a handful of
variables, five of them in fact,that move the needle.
There's consumption, investment,inventory, imports, and exports.
We're going to look at each one of these, determine the impact
of each one of these on the GDP calculation.
We'll start with consumption. Consumer spending is perhaps the

(01:04):
largest contributor to GDP and accounts for nearly 70% of the
total. Now there's all kinds of crazy
adjustments that are made and I'm not even going to discuss
those today. We're just going to look at the
changes that have occurred between the fourth quarter and
the first quarter and then the second quarter.
Try and explain what we're seeing.
You have to remember the first quarter traditionally the
slowest quarter when it comes toconsumer spending, but the

(01:26):
economic contraction reported inthe first quarter is not a
reflection of that annual cycle.The number that gets reported
has already been seasonally adjusted.
The second variable is investment.
If you're investing in building new homes and factories and
public infrastructure, that contributes to higher GDP.
This is the same for inventory. You think of inventory almost
the same as you would investment.

(01:48):
When you're increasing inventory, you're actually
investing in the future. So if your economy stops
manufacturing and you're depleting inventory, then the
reduction in inventory actually subtracts from GDP.
And then the final two categories have to do with the
balance of trade. Exports contribute to GDP and
imports subtract from GDP. So now we have a basic

(02:09):
understanding of the five variables that make up the GDP
calculation. You can in fact go to the Bureau
of Economic Analysis website anddownload the analysis for each
GDP report yourself and see whatI'm talking about on today's
show. So at the end of the first
quarter, the narrative being attached to the 0.5% economic
contraction was that the first quarter was the hangover from
the terrible Biden economy and then the second quarter is a

(02:33):
reflection of the positive changes of the mega economy.
As we go through the numbers, we'll see if we in fact agree
with that analysis. Now from the first quarter to
the second quarter, consumer spending is up ever so slightly.
On a seasonally adjusted basis, the change is not enough to in
fact move the needle. So from the fourth quarter to
the first quarter, the change inconsumption was also not enough

(02:56):
to move the needle on a seasonally adjusted basis.
So it looks like consumer spending is not a big factor.
The second category is investment.
The numbers for investment are actually way down in the second
quarter. You would think with all of the
announcements being made about manufacturing coming back to the
United States and new data centers and investment, you
would think those numbers would be higher, but it's actually not

(03:16):
the case. So this part of the economy
shrank in the second quarter, and still the headline numbers
showed a 3% annualized growth inthe second quarter.
Let's look at inventory. While inventory is down slightly
in the second quarter, the warehouses across our country
are at near record levels. Just take a look at the lots in
any car dealership if you want to get a sense for what I'm

(03:38):
talking about. While inventories are high,
inventory growth is not responsible for the swing from
-0.5% GDP to plus 3% GDP in 90 days.
Inventory is not a factor. And that leaves one final major
element. That's the balance of trade,
made-up of both imports and exports.
Exports were up slightly, but basically flat from first to

(04:00):
second quarter. So that too was not a huge
contributor to GDP. Exports can make a difference,
but the increase was really, really small.
So, so far, we have consumer spending going sideways.
Investment is down, inventory isdown slightly.
Exports are basically going sideways.
And if we stopped here and we added U all the numbers, you

(04:20):
would conclude that in the second quarter, the second
quarter was actually weaker thanthe first quarter.
But we've got one variable left and that is imports.
The entire US supply chain surged container volumes in the
first quarter in order to get ahead of the April 2nd tariff
announcement. Imports actually subtract from
GDP, which explains why the first quarter showed economic

(04:42):
contraction. Everyone was trying to front run
the tariff announcements. In the second quarter, imports
are down significantly as supplychains try to consume the
imports that are now sitting in inventory from the first
quarter. What we're seeing is a very
noisy GDP reading. That's a pure artefact of the
way balance of trade is used in the GDP calculation.

(05:04):
If imports increase, then the economy gets weaker, and if
imports decrease then paradoxically the economy is
said to get stronger. So now you know why the US
economy was relatively red hot compared with the previous
quarter. Imports fell off a Cliff because
of the threat of tariffs. Actually would not have even
mattered whether tariffs got implemented or not.

(05:25):
The threat of tariffs was enoughto cause a surge in imports in
the first quarter, which caused a weak first quarter.
And it was that surge in importsin the first quarter that caused
the second quarter to decline inimports that would have happened
whether the tariffs were implemented or not.
It was baked into the cake regardless.
So hopefully after these 5 minutes you have a greater
insight into the GDP calculationand why these headlines make no

(05:49):
sense as you think about that. Have an awesome rest of your
day, go make some great things happen and we'll talk to you
again tomorrow.