GDP Revised Higher, Core Inflation Revised Lower

As expected, second quarter real GDP growth was revised higher to +4% annualized from the originally reported+3.4%. The improvement was based on stronger export growth, slowing import growth, and rising business spending. The pace was a clear acceleration from the +.6% annualized GDP growth in the first quarter, and in fact was the fastest rate of growth in the past year. Unfortunately, most economists are downgrading expectations for the remainder of the year. For the entire year, growth is expected to average around 2%.

The smaller trade deficit helped trade contribute 1.4% toward growth, its best positive contribution since 1996. Commercial construction grew 28% annualized in the second quarter, the largest increase since 1981. Residential construction continues to be a drag to GDP growth, and its negative impact was revised higher in the second quarter to reduce GDP by -.6%.

Investment in equipment almost doubled from the first quarter, as the inventory overhang was worked past, to grow 4.3%. Inventory growth remained low for the first half of the year, which means there is more scope for growth in the second half of the year, a positive for GDP.

Core PCE, the Fed's preferred inflation measure, rose less than expected at +1.3% annualized (consensus 1.4%). This was the smallest gain in four years. The price index held steady at 2.7%.

Consumer spending was revised slightly higher to 1.4% from 1.3%, but this is still the smallest increase in the past year. Tighter credit conditions, and increasing concerns about the economy and employment growth, may keep this figure subdued during the balance of this year.

GDP measures the total output of goods and services produced in the economy.