US: Second Estimate of Q2 GDP Still Points to Contraction in Economic Growth     

Fundamental analysis of Forex market

The second estimate of second quarter real GDP declined by 0.6% quarter-over-quarter (q/q, annualized). This was a slight upgrade from the -0.9% reported in the advance estimate released last month. The reading came in a touch above the consensus forecast which called for a decline of 0.9%.

Consumer spending rose by 1.5%, up from the advance estimate (1.0%). Gains were concentrated in services spending (3.6%), while goods expenditures (-2.4%) were lower on the quarter. Declines were primarily concentrated in non-durables (-3.7%), while durable goods (-0.1%) were flat.

Business investment was also flat in the second quarter, an improvement from the previous estimate (-3.9%). Declines were concentrated across structures (-13.2%) and equipment spending (-2.7%), while investment in intellectual property products (10%) was up last quarter.

Residential investment was down 16.2% and shaved 0.8 percentage points (pp) from headline growth.

Government spending (-1.8%) fell for the third consecutive quarter, as spending at both the federal (-3.9%) and state & local (-0.6%) level registered declines. In terms for federal outlays, declines were entirely concentrated in non-defense (-10.4%) spending. Defense outlays were up 1.1%.

Exports surged by 17.6%, largely unchanged from the previous estimate. Gains were spread across exports of services (25.4%) and goods (14.6%). Conversely, import growth (2.8%) moderated last quarter, with all the gains coming from the import of services (21.5%), while goods imports (-0.4%) were a touch lower. Overall, the trade deficit narrowed in the second quarter, adding 1.4pp to headline growth.

Inventory investment was revised a touch higher, now subtracting 1.8pp (previously 2pp) from GDP growth.

Real Gross Domestic Income increased by 1.4% in the second quarter, compared with an increase of 1.8% in the first quarter. Corporate profits were up 26.7%, more than offsetting last quarter’s 8.4% decline. Measured as a share of GDP, corporate profits currently sit at 12.2% – up 0.4pp from last quarter.

Key Implications

After incorporating a more complete set of data, the second estimate of Q2 GDP was little changed from what was suggested by last month’s advance release. Despite GDP having contracted in each of the last two quarters, we continue to believe that the U.S. economy remains in expansionary territory.

Perhaps the most anticipated data point of today’s release was the Q2 reading of Gross Domestic Income (GDI). Differences between GDP and GDI have historically been small, however, the two measures have shown considerable divergence more recently. Because GDI has historically been less susceptible to large revisions, it seems likely that GDP could be suffering from some measurement error, which is overstating the current level of weakness. We suspect the more comprehensive benchmark revisions (due out on September 29th) will show GDP being revised higher, helping to narrow the gap.

While domestic demand slowed through the first half of the year, our current tracking suggests both consumer spending (2%) and business investment (4%) are set to accelerate in the third quarter. However, a sizeable drag from residential investment (estimated to shave over 1pp from growth) and further giveback on inventory investment will likely keep Q3 growth hovering in the 0%-0.5% range.

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