U.S. Economy Grew at a 1.9% Annualized Pace in the Second Quarter

Daily Forex Fundamentals | Written by RBC Financial Group | Jul 31 08 14:04 GMT |

The U.S. economy pumped out a modestly weaker-than-expected growth rate in the second quarter, with real GDP growth of 1.9% at an annualized rate, slower than the consensus forecast for a 2.3% increase. The benchmark revisions showed that 2007 growth in the U.S. economy was 2%, slower than the prior estimate of 2.2%, and that economic activity contracted at a 0.2% annualized pace in the fourth quarter of 2007, much slower than the prior estimate of a 0.6% rise. Growth in the first quarter 2008 was revised marginally lower as well to 0.9% from 1%. The acceleration in economic growth in the second quarter of 2008 reflected a pick-up in personal consumption, which increased at a 1.5% annual pace, up from 0.9% in the first quarter. Spending was concentrated in non-durable goods, which rose 4% in the quarter, with spending on services rising 1.1% and purchases of durable goods falling at a 3% annualized pace. The receipt of tax rebate cheques from the U.S. government's fiscal stimulus package boosted disposable personal incomes in the quarter and supported the stronger consumer spending. Investment continued to contract on the back of a 15.6% annualized drop in residential fixed investment with spending on equipment and software slipping by 3.4% but investment in non-residential structures rising at a 14.4% annual rate. The trade sector gave a strong boost to the economy, contributing 2.4 percentage points to the quarterly growth rate as exports grew at a 9.2% pace and imports (which are subtracted from the GDP calculation) contracted at a 6.6% rate. Partially offsetting the trade sector's contribution was a significant paring of inventories, which trimmed 1.9 percentage points from the economy's growth rate in the quarter. On the inflation front, the PCE deflator increased at a 4.2% annual rate in the second quarter, faster than the first quarter's 3.6% pace. Excluding food and energy prices, the deflator rose at a 2.1% pace, slower than the first quarter’s 2.3% pace. Strengthening consumer expenditures and falling inventories are generally a favourable mix for growth in subsequent quarters. However, much of the strength in consumer spending was related to the receipt of the tax rebate cheques the effect of which is likely to wane over the second half of the year and the paring of inventories, which may denote that businesses are anticipating a significant period of weaker activity. This slowing in combination with energy prices remaining high and languishing equity markets provides clear downside risks to growth in the quarters ahead. At the same time, the rise in the GDP deflator highlights the growing upside risks to the inflation outlook. Our forecast is that, against this backdrop of slowing economic growth but elevated headline inflation, the Fed will hold the policy rate steady at 2% and continue to closely monitor the economic data to determine whether it is the growth or the inflation risk that is beginning to dominate. RBC Financial Group http://www.rbc.com The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.