United States: Second estimate confirms economy slowed in Q2
August 29, 2019
Economic growth in the second quarter was slightly lower than previously reported, according to a second GDP estimate released by the Bureau of Economic Analysis. The economy expanded 2.0% over the previous quarter in seasonally-adjusted annualized terms (SAAR), which was down a notch from the advance estimate of 2.1% growth and well below the 3.1% expansion logged in Q1. In annual terms, growth was unchanged at 2.3% in Q2, down from 2.7% in Q1.
Overall, the second GDP reading reaffirmed the diverging trends in the economy: While downward revisions to most components emphasized growing weaknesses within the economy, private consumption growth was even more robust than initially expected. Particularly, investment figures fared more poorly than previously reported. The contraction in private fixed investment was slightly sharper than in the first reading (Q2: -1.1% SAAR; previous estimate: -0.8% SAAR; Q1: +3.2% SAAR), while residential investment fell considerably more than projected in the previous estimate. Moreover, the downward revision to inventories increased its drag on growth in the quarter. Weaker state and local government spending than previously estimated brought government expenditure growth down to 4.5% SAAR in Q2 from the 5.0% advance estimate (Q1: +2.9% SAAR). On a brighter note, personal consumption was revised up notably, from 4.3% to 4.7%, highlighting the sustained strength of the American consumer despite protracted trade tensions with China.
Turning to the external sector, exports of goods and services fell an even sharper 5.8% (previous estimate: -5.2% SAAR; Q1: +4.1% SAAR), while growth in imports of goods and services was unchanged (Q2: +0.1% SAAR; Q1: -1.5% SAAR).
Looking ahead, economic growth is expected to cool further as trepidation among businesses amid the escalating trade tensions with China dampens investment. That said, resilient household spending should continue supporting the economy. The downward revision to headline GDP could also give the Federal Reserve additional ammunition to lower rates again at its September meeting.
Commenting on the implications of the GDP report for interest rates, Leslie Preston, senior economist at TD Economics, noted:
“In this two-track economy the Federal Reserve is likely to focus more on the investment side when it cuts rates in September. The relentless escalation and détente cycle on trade actions by the White House has damaged business confidence. Taken together with a weaker global economy, the outlook for the U.S. economy has become more fragile. The U.S. consumer is the picture of health for now, but if the weakness in business sentiment infects the consumer the outlook would become more concerning and would require greater monetary easing by the Fed.“
Author: Lindsey Ice, Economist