- The revisions to real GDP growth in the second quarter were fairly minimal. Growth was revised down one tick to 2.0% from 2.1% in the advance estimate, resulting from an upward revision to consumer spending offset by downgrades to inventories, trade and government.
- Consumer spending was even hotter than previously reported, jumping 4.7% in Q2 (prev.4.3%), as all categories saw slightly higher spending.
- Business investment was unrevised, posting a 0.6% decline in Q2. There were some revisions to the components; the decline in structures investment is now a bit smaller (-9.4% vs -10.6% prev.), and investment in intellectual property products was revised down to 3.7% (prev 4.7%).
- Residential investment was revised slightly weaker, now down 2.9% on the quarter (prev. 1.5%).
- Government spending grew at 4.5%, down from a previously reported 5% on softer growth in state and local government spending (federal spending was revised up).
- The drag from net exports and inventory disinvestment was also a bit larger. The two components had subtracted 1.5 percentage points (pp) in the first release, and now subtracted 1.6 pp.
- Corporate profits for the second quarter were also released this morning and they rebounded 5.3% in Q2. However, that comes after two consecutive quarters of decline, and leaves profits up a modest 2.7% on a year-on-year basis.
Key Implications
- Overall the revisions to GDP don’t change the picture of the U.S. economy in the second quarter. Growth was driven by a strong consumer and government spending, while the investment side of the economy was lackluster.
- In this two-track economy the Federal Reserve is likely to focus more on the investment side when it cuts rates in September. The relentless escalation and détente cycle on trade actions by the White House has damaged business confidence. Taken together with a weaker global economy, the outlook for the U.S. economy has become more fragile. The U.S. consumer is the picture of health for now, but if the weakness in business sentiment infects the consumer the outlook would become more concerning and would require greater monetary easing by the Fed.
