U.S.: Q2 2008 GDP Weaker than Expected

Daily Forex Fundamentals | Written by TD Bank Financial Group | Jul 31 08 14:35 GMT |

U.S. GDP rose by 1.9% Q/Q ann., which was worse than the market consensus for a 2.3% Q/Q ann. gain. Personal consumption rose by a strong 1.5% Q/Q ann., but was also lower than the 1.7% Q/Q ann. gain expected by the markets. Net exports were the key contributor to economic activity during the quarter, adding a whopping 2.42 percentage points. There were some downward revisions to GDP over the past year, with Q4 GDP revised significantly downwards, from 0.6% Q/Q ann. to -0.2% Q/Q ann. The U.S economy grew by 1.9% Q/Q ann. in Q2, following the downwardly revised 0.9% Q/Q ann. increase in Q1 (previously reported as +1.0% Q/Q ann.). The growth in Q2 GDP was much lower than the 2.3% Q/Q ann. expected by the markets. Consumer spending, which was boosted by the federal fiscal stimulus package, was one of the key drivers of the resurgence in economic activity, rising by 1.5% Q/Q ann., up from the 0.9% Q/Q ann. pace of growth in Q1. On the whole, personal spending contributed a massive 1.08 percentage point to GDP during the quarter, which is significantly higher than the 0.61 percentage points contributed in Q1. Exports were another strong driver of growth, as they rose by a strong 9.2% Q/Q ann., while imports dropped for the third straight quarter, falling by 6.6% Q/Q ann., following the 0.8% decline in Q1. As a result, net trade added a whopping 2.42 percentage points to GDP, which was the biggest contribution of this component since 1980. The rest of the details of the report, however, were quite mixed. Residential construction fell for the tenth consecutive quarter, falling by 15.6% Q/Q ann., but was better than the 25.0% Q/Q ann. drop in Q1, suggesting that the pace of decline may be slowing. In terms of revisions, there were significant downward revisions to some of the previously reported GDP numbers. In addition to the modest drop in Q1 2008 GDP from 1.0% Q/Q ann. to 0.9% Q/Q ann., Q4 2007 GDP was revised lower, from +0.6% Q/Q ann. to -0.2% Q/Q ann., which is the first negative print on U.S GDP since Q3 2001. Despite the weaker than expected print on U.S. GDP in Q2, the report is unlikely to sway the Fed's interest rate decision next week in either direction, since output growth in 2008 is likely to remain in line with the Fed's central tendency of 1% to 1.6%. U.S. consumers continue to be buffeted by the headwinds of a deteriorating labour market, high energy prices, wealth reduction from the prolonged correction in the housing market and tighter credit conditions. As such, consumer spending (which accounts for over 70% of U.S. economic activity) is likely to be subdued in the coming months, adversely affecting economic activity in the second half of 2008. TD Bank Financial Group The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.