United States: Second GDP release confirms buoyant economic activity in Q2
A second GDP estimate confirmed the economy grew at the fastest pace in almost four years in the second quarter, buttressed by robust private outlays and a strong showing from the external sector, which benefited from the front-loading of export activity ahead of the implementation of reciprocal tariffs between China and the U.S. at the beginning of Q3. GDP increased 4.2% in seasonally-adjusted annualized (SAAR) terms in Q2, an upward revision of 0.1 percentage points compared to the preliminary estimate. The print beat market analysts’ expectations of 4.0% and follows a 2.2% growth reading in the first quarter. On a year-on-year basis, GDP growth clocked in at an upwardly revised 2.9% (previously reported: +2.8%) in Q2, up from 2.6% in Q1.
Growth in private consumption was revised down a notch to 3.8% SAAR, from 4.0% in the previous estimate, due to lower growth in goods purchases. Nevertheless, private spending was still well above the 0.5% print recorded in Q1 and remained the single biggest contributor to the headline growth observed in the quarter. It benefited from the tightest labor market in decades, and from the tax cuts enacted in December 2017, which are thought to fully take effect on private expenditures after a few months of delay. Conversely, government spending growth was revised up from 2.1% to 2.3% in the second estimate, thanks to increased defense spending resulting from the lifting of spending caps in Q1.
Regarding investment dynamics, the weakness of the residential sector continued to be apparent, with a sharp downward revision to the already negative growth print recorded in the first estimate. Residential fixed investment growth was revised to -1.6% SAAR, from -1.1% in the first estimate and -3.4% in Q1. On the other hand, non-residential fixed investment growth was even more robust than previously estimated. It was revised markedly upwards to +8.5% SAAR (previously reported: +7.3% SAAR) thanks to a jump in investment in intellectual property products, and stronger growth in equipment spending. The sharp drawdown in inventories observed in the quarter in anticipation of the U.S. tariffs—and retaliatory action by its main trade partners—was revised downwards slightly, but nevertheless still subtracted a full point from the GDP growth print. Inventories are likely to be partially rebuilt over the third quarter, which should conversely provide a boost to growth in Q3.
Lastly, the external sector posted an even better performance than originally estimated. Indeed, although the surge in exports—in the quarter was revised downwards slightly, to +9.1% SAAR (previous estimate: +9.3% SAAR), the import bill fell by a larger magnitude (-0.4% SAAR, previous estimate: +0.5% SAAR), as imports of petroleum products were sharply revised downwards. Thus, the net growth contribution of the external sector was revised up to 1.2 points, from 1.1 points in the previous estimate.
The outlook for the third quarter is likely to remain bright, in good part due to strong consumption dynamics amid high consumer confidence, a tight labor market, and an ongoing expansion of government spending. However, headwinds are starting to mount due to the rapidly increasing trade-related tensions between the United States and its main trading partners, particularly China. The uncertainty resulting from these tensions is weighing on business confidence and firm’s investment plans, which suggests the economy might be starting to decelerate in H2 2018.