The second-quarter GDP report is indicative of very modest growth in the quarter with the downward revision slightly greater than expected. Most of the downward surprise, however, was from a lower level of inventories with growth in a number of key expenditure areas being revised upward.
Inventories had previously been estimated as contributing 0.2 percentage points (pp) to overall GDP growth, but it is now estimated as subtracting 0.2pp. Our expectation is that inventories would be lowered but only to the point of providing no contribution to growth. The other source of downward surprise was net exports, which are now only adding 0.1pp to growth rather than the 0.6pp previously estimated. Our expectation had been for the contribution to be lowered to only 0.2pp. This revision mainly reflected growth in exports being cut to 3.1% from the previously estimated 6.0%.
The main offsets to these downward surprises were greater strength in consumer spending and business investment. Growth in the former was raised to a still anemic 0.4%, yet this is up from the previously estimated 0.1%. Growth in business investment has been bumped up to 9.9% from the earlier estimate of 6.3%. These upward revisions contributed to growth in final sales to domestic buyers being raised to 1.1% from 0.5%.
The strength in business investment was helped by indications that corporate after-tax profits rose a solid 4.1% in the second quarter of the year, which is up from the negligible 0.1% gain recorded in the first quarter.
Annualized quarterly growth in the core PCE deflator, the key inflation measure in the GDP report, was revised up slightly to 2.2% from 2.1%.
Today's GDP report confirms that in the first half of this year, the economy experienced very slow growth averaging less than 1%. This weakness in part reflects the effect of temporary factors such as supply-chain problems in the auto sector, which originated with the natural disasters in Japan in March. As well, the earlier spike in gasoline prices took a bite out of disposable income and cut into spending outside of energy purchases; however, these restraints are starting to ease. The recent industrial production numbers for July suggest that the auto sector is starting to recover with the motor vehicle component rising a robust 5.2% following declines of 6.6%, 0.4%, and 0.9% for April to June, respectively.
In terms of gasoline prices, they have come down from April's recent peak, and this is expected to provide a boost to consumer spending during the second half of 2011. To provide additional support to a bounce back in activity, policy has been, and will continue to be, highly accommodative. The statement issued following the August 9 FOMC meeting indicated that exceptionally low level of fed funds would be maintained “at least through mid-2013.” Fed Chairman Bernanke's speech later this morning will be watched very closely with financial markets pressing for some indication of additional near-term stimulus in the offing. source www.actionforex.com For the latest updates PRESS CTR + D or visit Stock Market news Today
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