2nd Qtr Real GDP Revised Up to +3.3% Annualized

The second revision of 2nd quarter real GDP was much stronger than expected, rising +3.3% QoQ annualized, versus a consensus expectation of +2.7% and an initial reading of +1.9%. This compares with real GDP growth of +.9% in the first quarter, and was the largest quarterly gain since the second and third quarters of 2007 when real GDP grew +4.8%.. Over the past year, real (inflation adjusted) GDP rose +2.2%, down from 2.5% in the first quarter. (Note – all these 2nd quarter data are reported as quarterly annualized, unless otherwise identified.) Personal consumption was also revised higher than expected to +1.7% annualized from 1.5% originally reported in the original preliminary update. Consumer spending is important because it accounts for about 2/3rds of US GDP. The rise in personal consumption from the +0.9% pace of the first quarter is probably due to the impact of the stimulus checks. Most of the rise in personal consumption was in non-durable goods, +4.2%, which probably reflects higher energy prices. Expenditures on services grew a more modest +1.3%, while durable goods consumption fell -2.5%, mainly due to lower auto sales. The fall in durable goods consumption is actually an improvement from the -4.3% decline of the first quarter. Real final sales were revised up to 4.8% from 3.9% in the first report. This is a substantial rebound from the sub 1% growth of the 4Q07 and 1Q08 pace. Core PCE (personal consumption expenditure) inflation held steady at +2.1%, as expected. But the headline GDP price index rose to 1.2% from the original estimate of 1.1%. As expected export growth was revised higher to 13.2% from 9.2% previously. In addition, imports fell more than expected by -7.6% versus +6.6% in the initial update. This caused net exports to become an important contributor to real GDP being revised higher. Record exports have helped offset the weakening domestic demand for goods and services. Excluding trade, the economy would have expanded at only +.2% in the 2nd qtr, and only +.1% in the 1st quarter. Unfortunately the boost from foreign demand may wane later this year as European and Asian economies also slow. Inventory investment was revised higher as inventories fell less than expected from -$62.2B in the initial forecast to -$49.4B in the second preliminary revision. This compares to -$10.2B in the first quarter. Higher state and local spending was the largest contributor to slightly higher government expenditure. Residential investment continues to be a significant drag on growth, falling -15.7%, while non-residential investment on structures rose +2.2%. Both figures were revised down by a tenth. Profits continued to decline in the second quarter, falling -2.4% compared to -1.1% in the first quarter. Corporate earnings are down 7% versus a year ago, the largest annual decline line the recession of 2001. For employees, real disposable personal income is now estimated to have fallen -.7% annualized in the first quarter, and to have risen +11.4% in the second quarter due to the rebate checks. Big picture, wages are not keeping up with inflation.