2nd Quarter GDP Close to Expectations Causing Little Market Reaction

Second quarter GDP figures show that growth rebounded from the weakness of the first quarter. GDP grew at a 3.4% annualized pace (consensus 3.2%), while the first quarter growth rate was revised slightly lower to +.6% annualized from +.7% previously reported. Versus the second quarter of 2006, GDP has grown +1.8% YoY, up from +1.5% in the first quarter of 2007, but down from the 3.2% pace of the second quarter of 2006.

Personal consumption fell dramatically to +1.3% annualized (consensus +1.5%) from 3.7% (revised down from +4.2%) in the first quarter. Durable goods demand rose +1.6% annualized while non-durable goods fell -.8% annualized in the second quarter. Services slowed to +2.2% annualized.

Gross private investment rebounded to positive territory for the first time since the second quarter of 2006, growing +3.1% annualized. Non-residential structures grew a huge 22% annualized, but the recent credit crackdown may slow this growth in the future. Residential construction fell for the sixth quarter in a row, falling an additional -9.3% annualized in the most recent quarter, which is a slowdown from the 16-20% pace seen in the prior three quarters.

Exports grew +6.4% annualized, relatively evenly divided between goods and services. The rise in exports was a major contributor to GDP this past quarter. Imports fell -2.6% annualized with services declining more than goods. Imports haven't fallen this much since the 2001 recession. Government consumption rebounded to the highest level in over a year, increasing +4.2% annualized. Defense spending rose +9.55 annualized.

Headline inflation moderated more than expected, falling to +2.7% annualized (consensus +3.4%) from 4.2% in the first quarter. Core inflation dropped to 1.4% in the second quarter, as expected, from 2.4% in the prior period.

Normally GDP numbers would be watched carefully by the market, but with all of the other uncertainty, they are not having much impact today. Ten year Treasury yields rose after the release, and are now up 2bp verus yesterday's close. On net, the numbers are a little better than expected and should support third quarter GDP growth, based on the smaller than expected increase in inventory growth, and larger than expected increase in fixed investment by businesses. The increase in exports and decrease in imports were also a boost, though the slowdown in consumer spending indicates the consumer may be weakening. The Fed is unlikely to react to this report.