GDP Revisions as Expected, Jobless Claims Fall More Than Expected

As expected, second quarter GDP was revised slightly lower to 3.8% annualized (from 4%) in the final revision. This is still the fastest quarterly pace in the last year, and a considerable improvement from the +.6% annualized gain in the first quarter, but it is also likely to be the fastest quarter for a while. Most economists are looking for the growth of GDP for the next year to average closer to 2% annualized. Most of the growth in the second quarter has been attributed to a growth in export demand as overseas economies grow robustly and the declining dollar helps make US goods and services more competitive globally. Exports made the best contribution to GDP since 1996.

Personal consumption held steady at 1.4%.

Total PCE inflation eased down to 2.6% annualized (from 2.7%) while core PCE inflation unexpectedly rose to +1.4% from the previously reported 1.3% annualized rate. PCE inflation is the broadest measure of inflation, and is the Fed's preferred observation. Core PCE inflation, which excludes food and energy, rose 2% YoY when compared to the second quarter of 2006.

Citi now expecting third quarter GDP to slow to 2.5%, and fourth quarter to slow further to 1.7%, as the credit tightening and housing slowdown negatively impact growth prospects.

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Initial unemployment claims fell more than expected, falling to 298k (consensus 316k), the lowest weekly number since May. Though hiring is slowing, it appears that layoffs (other than in the housing area) remain low. The four week average drops to 311k. Continuing claims were as expected, rising 7k.