Unexpected Strength in Revised Q2 GDP

Unexpected Strength in Revised Q2 GDP

BY: MARK LIEBERMAN, FIVE STAR INSTITUTE ECONOMIST

Shrugging off cutbacks in government spending, the nation’s economy grew in the second quarter at a faster pace than originally reported, the Bureau of Economic Analysis said Thursday.

Second quarter growth was calculated at a seasonally adjusted annual 2.5 percent rate, a sharp increase from the 1.7 percent initially reported for gross domestic product (GDP), the broadest measure of the nation’s economy, a month ago.

Economists had expected the nation’s GDP to improve to a 2.2 percent annual growth rate.

The revised economic report card covered the first full quarter of government sequester cuts which took effect effect March 1. The stronger growth suggests a recovery on track, though the growth rate is shy of the 3 percent trend rate, a threshold generally considered necessary to expand payrolls.

In the same report, BEA said corporate profits rose 3.9 percent in the second quarter after falling 1.3 percent in the first.

The change in GDP largely reflected a positive contribution from trade. In the initial report issued in July, which relied on incomplete data and estimates, net exports—exports less imports—subtracted about $15 billion from the nation’s economy. In the revised report, net exports added $17 billion as exports exceeded imports.

The revised data also showed a stronger contribution from inventory investment than originally reported, with inventories rising $85 billion in the revised report compared with $78.7 billion in the first GDP report.

The 2.5 percent annualized growth rate—if confirmed by the “final” GDP report for the second quarter next month—would mean the economy grew at its fastest pace since the third quarter last year.GDP grew 1.1 percent in the first quarter and 0.1 percent in the fourth quarter of 2012.

The stronger growth rate would also undercut arguments advanced by opponents of the across-the-board government sequester cuts who said it would lead to slower growth.

Indeed, the GDP report showed government spending in the second quarter was $6.1 billion below the level of the first quarter, but most of the reduction—$3.8 billion—came at the state and local level. Federal spending was down a net $2.3 billion as non-defense spending fell $2.8 billion from the first quarter, while defense spending rose.

The quarter-over-quarter reduction in federal spending was the ninth in the last three years.

GDP is the sum of personal consumption expenditures, investment spending, government outlays, and net exports (exports and imports). The “formula” for GDP is generally expressed as C (consumer spending) plus I (investment) plus G (government) less X (exports less imports). If exports exceed imports, the “X” in the formula is positive; if imports exceed exports, it is negative.

Personal consumer spending, the largest component of the economy, grew at 1.8 percent from the first quarter, unchanged from the first report. Personal consumer spending represents about 69 percent ofGDP.

Residential fixed investment rose to $511.7 billion in the second quarter from $490.3 billion in the first, but in the initial report, residential fixed investment was estimated at $513 billion. Residential fixed investment grew at 12.9 percent from the first quarter, down from the initially reported 13.4 percent growth rate.

Non-residential fixed investment on structures grew 16.1 percent in the second quarter—a sharp increase from the initially reported 6.8 percent growth after dropping 25.7 percent in the first quarter. In dollars, spending on non-residential structures grew $22.2 billion in the second quarter instead of the $12.3 billion first reported.

The improvement in profits came largely in the non-financial sector, where second quarter profits rose $51.6 billion after falling $16.3 billion in the first quarter. In the financial sector, second quarter profits were up $14.9 billion after falling $5.2 billion in the first.

Prices of goods and services purchased rose 1.1 percent year-over-year, according to the report. Excluding food and energy, prices increased 1.2 percent. The price index report in the GDP is based on actual purchases while the Consumer Price Index is based on posted prices of goods and services.

 

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