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US: Revisions Nudge Growth Up to 4.2% in the Second Quarter

The U.S. economy grew at a 4.2% annualized pace in the second quarter according to the BEA’s second estimate. This is a tick better than the advanced estimate (4.1%), and also higher than market expectations of 4.0% growth. The upward revision to headline growth reflected stronger business investment and net trade.

Real personal consumer spending remained strong but was revised down slightly to 3.8% from the initial 4% estimate. This reflected slightly weaker growth in durable and non-durable goods. Growth in services spending was unchanged at 3.1%.

Business investment was revised up to 8.5% from the already healthy 7.3% initial estimate due to spending on equipment and intellectual property products.

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Residential investment was revised down, now estimated to have declined 1.6% in the second quarter (previously: -1.1%).

Government spending was revised up a touch at both the federal and state and local level.

A small downward revision to exports (-0.2 to 9.1%) was more than offset by a downward revision to imports that are now estimated to have contracted 0.4% in the second quarter rather than rising 0.5%. This results in net trade contributing an additional 0.1 percentage points for a total contribution of 1.2 p.p. to headline GDP growth in the quarter.

Key Implications

Typically the second estimate of GDP for 18Q2 is uneventful and this time is no different. However, the additional information received by the BEA since the last estimate depicts an economy with a bit firmer domestic spending in the second quarter than previously estimated. Stronger business spending is consistent with tax reform and strong consumer and fiscal expenditures over the past few quarters. Moreover, although the new data does little to change the narrative of a U.S. economy firing on all cylinders in the first half of the year, ongoing strength in consumer and business confidence suggest that the expansion has more room to run.

Looking ahead, monthly indicators point to a strong expansion again in the third quarter, driven by healthy consumer, business, and government spending. We are tracking a modest slowing of GDP growth to 3.1% (annualized) in the third quarter as the bump from tax reform and export strength related to the front-running of tariffs fade. That said, trade policy uncertainty has undoubtedly dented business confidence domestically and abroad, possibly leading businesses to delay further investment. An escalation in trade tensions could push our forecast down.

Nevertheless, despite the downside risks from trade policy uncertainty and financial market volatility in emerging markets, the Fed is likely to remain on track to gradually normalize monetary policy. With inflation at target and the economy running hot, we anticipate that the Fed will raise rates twice more this year, bringing the upper end of the target range to 2.5% by the end of the year.