The United States economy expanded faster than previously estimated in the second quarter, with real gross domestic product rising at a 2.2% annualized pace, according to the Bureau of Economic Analysis in its third estimate of second-quarter GDP. The figure exceeded both the 1.5% consensus estimate and the 1.5% previously reported reading, marking a 0.7 percentage-point upward revision. The third estimate is the last of the BEA's three estimates for a quarter and incorporates the fullest source data available, a stage at which sizable revisions can still occur.

The BEA said the revision primarily reflected stronger investment, consumer spending and government spending than earlier estimates showed. First-quarter growth was also revised higher, to 2.5% from 2.1%, meaning the second quarter still represented a modest slowdown.

Key indicators from the report, compared with consensus forecasts and the prior estimate:

• Real GDP: +2.2% annualized vs +1.5% expected; previous estimate +1.5%
• Real final sales: +2.8% vs +2.3% expected; previous estimate +2.2%
• Consumer spending: +3.8%; previous estimate +3.4%
• GDP deflator: +6.1% vs +6.4% expected; previous estimate +6.4%
• Core PCE prices: +3.3% vs +3.6% expected; previous estimate +3.6%
• PCE prices:5.0%; previous estimate +5.3%
• PCE prices excluding food, energy and housing: +3.1%; previous estimate +3.4%
• PCE services prices excluding energy and housing: +3.6%; previous estimate +3.7%

Additional second-quarter details, compared with the previous estimate:

• Real final sales to private domestic purchasers: +4.6% vs +4.2%
• Real gross domestic income: +2.6% vs +2.2%
• Average of real GDP and real gross domestic income: +2.4% vs +1.8%
• Current-dollar GDP: +8.5% vs +8.0%
• Gross domestic purchases price index: +5.6% vs +5.8%
• Corporate profits increase: $384.0 billion vs $400.9 billion previously estimated

Selected components, compared with the revised first quarter:

• Private domestic demand: Q2 +4.6% vs Q1 +1.8%
• Real gross domestic income: Q2 +2.6% vs Q1 +2.5%
• PCE inflation: Q2 +5.0% vs Q1 +4.2%
• Core PCE inflation: Q2 +3.3% vs Q1 +3.9%
• Corporate profits increase: Q2 $384.0 billion vs Q1 $63.4 billion

The more telling detail sits beneath the headline. Real final sales to private domestic purchasers increased 4.6%, up from 4.2% previously estimated and well above the revised 1.8% first-quarter pace. This measure combines consumer spending and private fixed investment while excluding inventories, government spending and trade, and it points to considerably stronger underlying private demand than the headline GDP figure alone suggests. Consumer spending, investment and exports supported overall growth, while rising imports subtracted from GDP, a mechanical feature of the national accounts in which imports are netted out of domestic production.

Inflation revisions were more encouraging. Core PCE prices, the inflation gauge the Federal Reserve tracks most closely, were lowered to 3.3% from 3.6%, and headline PCE prices were reduced to 5.0% from 5.3%. A downward revision does not, however, mean inflation cooled across the board compared with the previous quarter: headline PCE inflation accelerated from a revised 4.2% in the first quarter, while core inflation slowed from 3.9%.

Corporate profits also posted a substantial increase, although the gain was trimmed from the previous estimate, with the second-quarter rise measured at $384.0 billion versus $400.9 billion previously.

Market Reaction

US stocks moved higher after the data this morning, with the S&P up 25 points at 8:40 a.m. ET. The Dow was up 124 points and the Nasdaq 100 was up about 67 points.

US Treasury yields were lower across the curve:

• 2-year: 4.852%, down 3.74 basis points
• 5-year: 5.036%, down 2.73 basis points
• 10-year: 5.234%, down 2.08 basis points
• 30-year: 5.584%, down 1.00 basis point

The curve was bull steepening, with shorter-term yields falling faster than longer-term yields. The 2-to-10-year spread widened by approximately 1.7 basis points to +38.3 basis points.

In foreign exchange, EURUSD moved above its 100-hour moving average at 1.1366, reaching a high of 1.1380. That moving average had acted as resistance since the price broke lower on September 10. Holding above it marks a bullish tilt and would have traders looking toward the falling 200-hour moving average at 1.1405 as an upside target; reaching and passing that level would increase the bullish bias, at least in the short term.

Analysis

ForexLive's assessment was that the headline beat matters, but the 4.6% private-demand reading gives the report more substance. Consumers and private investment showed strength, which the publication said could give the Federal Reserve room to maintain restrictive policy, while softer core inflation provides an offset even though headline price pressures remained elevated. Stronger demand would normally support the dollar and Treasury yields, and lower inflation readings could temper that response and support equities. The publication also cautioned that these are backward-looking quarterly figures, so more recent inflation and employment reports remain important for judging the next policy move.

Attention now turns to the US jobs report, due Friday. Estimates call for nonfarm payrolls to show a 90,000 gain, down from the oversized 162,000 increase last month, with the unemployment rate expected to hold steady at 4.1%.

Source: ForexLive