Revised U.S. Economic Growth Spikes in Second Quarter

Daily Forex Fundamentals | Written by RBC Financial Group | Aug 28 08 14:38 GMT |

Estimates of second-quarter GDP growth were widely expected to be revised up to reflect the more favourable trade numbers for June that were released earlier this month. However, market expectations were assuming a revised growth rate of only 2.7% in the second quarter, up from the first, or advance, estimate of 1.9% and a first-quarter gain of 0.9%.

The impact of the more favourable trade data was clearly evident. Second-quarter export growth was revised up to 13.2% from the advance estimate of 9.2%. The originally estimated 6.6% decline in imports deepened to a drop of 7.6%. Altogether, the improvement in net exports contributed about one-half of the overall lift in GDP growth.

Inventories continued to be a major subtraction to growth, cutting the gain in GDP by a lesser 1.4 percentage points than the 1.9 percentage points estimated earlier. Other contributions to the upward revision to overall growth came from the 1.7% gain in consumer spending from 1.5% previously and the robust 3.9% rise government spending from 3.4% in the advance estimate.

Business investment was revised down slightly to 2.2% from 2.3%. The second-quarter profits numbers, which were released for the first time this morning, provided little reason for optimism that this expenditure area will strengthen markedly going forward. After-tax profits dropped 3.8% in the quarter following a modest 1.1% rise in the first.

Annualized quarterly growth in the core PCE deflator, the key inflation measure in the GDP report, was left unchanged at 2.1%. Similarly the year-over-year rate was left unchanged at 2.2%.

The relatively robust second-quarter growth rate is in sharp contrast to expectations, which set in at the onset of the financial market turmoil a year ago. What helped stave off a bleaker outcome was, in part, a more immediate response to the fiscal stimulus package along with stronger-than-expected export growth.

Looking ahead, there are already some signs that the impact of the tax rebates is starting to wane going into the third quarter and expectations that it will be totally spent by the fourth quarter. The support to exports from the earlier depreciation of the U.S. dollar may be more long-lived, although the greenback is starting to trend higher. More worrying on the trade front near-term are indications of weakening growth overseas.

As a result of these factors, our forecast assumes that the second quarter will likely represent a peak in U.S. economic growth this year, with activity moving lower during the second half of the year. The prospects of weakening growth going forward are expected to keep the Fed on the sidelines maintaining a still-stimulative 2.00% Fed funds rate. Our forecast assumes that this will continue to be the case through the middle of next year before this interest rate starts to be gradually raised.

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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.