Revisions to second quarter GDP blew away any claims of recession for spring. The Commerce Department's first revision to second quarter GDP boosted the quarter's growth rate sharply to 3.3 percent from the initial 1.9 percent. The revised estimate for second quarter GDP beat the consensus forecast for a 2.7 percent gain. The upward revision was primarily due to upward revisions to exports and durables consumption. The second quarter jump followed a modest 0.9 percent increase the prior quarter.
On the inflation front, the GDP price index was revised to an annualized 1.2 percent - up from the initial estimate of 1.1 percent. The market had expected no change from the initial estimate. The sharp easing in overall price index was technical in nature, caused by a spike in nominal imports cutting into nominal GDP growth. In contrast, the inflation for final sales of domestic purchases was revised up to a strong 4.3 percent, compared to the initial estimate of 4.2 percent Headline PCE inflation was unrevised at 4.2 percent and up from 3.6 percent in the first quarter. Core PCE inflation also was unchanged--coming at 2.1 percent from 2.3 percent in the first quarter.
Year-on-year growth for real GDP eased to 2.2 percent in the second quarter-down from 2.5 percent in the first quarter.
The bottom line is that the economy has been growing much better than expected despite the credit crunch. It is still likely that the economy will slow during the second half-but perhaps not as much as the Fed needs. Today's report likely boosted the odds of a Fed rate increase in January.
Market Consensus Before Announcement
GDP for the second quarter came in relatively strong compared to expectations just a few months ago. Second quarter real GDP posted a 1.9 percent annualized gain, following a 0.9 percent rise the prior quarter. Since the initial estimate, improvement in the trade sector and a rise in inventories point toward an even higher estimate for second quarter GDP - perhaps even a 3.0 percent pace. The second quarter overall inflation number was extremely quirky. The GDP price index rose an annualized 1.1 percent - down from the first quarter increase of 2.6 percent. The overall price index was moderated by the interaction of the import price index with other components. For now, for the overall economy, one should focus on the price index for domestic purchases which accelerated sharply to an annualized 4.2 percent from 3.5 percent in the first quarter. Headline PCE inflation jumped to 4.2 percent from 3.6 percent while core PCE inflation eased to 2.1 percent from 2.3 percent in the first quarter.
Real GDP Consensus Forecast for preliminary Q2 08: +2.7 percent annual rate
Range: +2.3 to +2.9 percent annual rate
GDP price index Consensus Forecast for preliminary Q2 08: +1.1 percent annual rate
Range: +1.0 to +1.4 percent annual rate |
