Q2 GDP Blowout — at Least on the Headline Data

SmokestacksIt turns out that the first quarter drop of 2.9% in gross domestic product (GDP) was truly a blip, just like economists had been saying all along. What is more of a surprise is just how strong the GDP report was — a massive gain of 4.0% for headline GDP, and that first quarter drop of 2.9% was revised to a drop of only 2.1%.

There is no way to deny that this seasonally adjusted GDP report from the Commerce Department was stronger than expected. After all, Bloomberg had a consensus estimate for a gain of 3.1% and was right in the middle of two lowered estimates last week from Goldman Sachs and from Morgan Stanley. Still, annual revisions are making this second-quarter GDP report harder to use on an apples-to-apples basis.

If you back out the inflationary component and look at the personal consumption expenditure price index, that rose by 2.3%. Bloomberg was calling for 2.0% or so in the report.

The implication here is that the negative first quarter and the very positive second quarter now puts the first half of 2014 with GDP growth of roughly 1%. The annual revisions also put the GDP growth during the second half of 2013 at 4.0% — the best reading in 10 years.

Household spending was shown to have risen by 2.5% in the second quarter. That was only a gain of 1.2% in the first quarter. Another driver was a change in private inventories, adding more than 1.6 points to the second quarter. Business spending was up by 5.5%. Exports rose by 9.5%, but imports rose even more at 11.7%.

Government spending and investment also contributed, with gains of 1.6% in the second quarter. Interestingly enough, the Federal spending was down but local government spending was up.

A final note here is that the GDP report was much better on the headline. These revisions and new inclusions make the number much harder to use a direct comparison. We would point to the price-weighted report being much closer to estimates at 2.3% vs. 2.0% expected as evidence that the report might not be quite what it seems if you just read the headlines.

On FOMC watch for 2:00 p.m. Eastern Time on Wednesday: We still expect no change in rates and a $10 billion tapering to $25 billion in the Fed's bond buying program per month from $35 billion.

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